The last thing two of the world’s biggest mining companies, BHP Billiton and Vale , need today is speculation that after the disaster at their jointly owned Samarco iron ore mine in Brazil they might also have to close big nickel-mining operations to stem a tide of heavy losses.

That, however, is precisely what has been suggested by research analysts at the investment bank Credit Suisse who have painted a depressing picture of demand for the metal which is largely used to make stainless steel.

Vale, as well as being the world’s biggest iron ore miner is the world’s biggest nickel producer thanks largely to its 2006 takeover of Canada’s Inco.

BHP Billiton is also a big nickel producer via its Australian business unit, Nickel West.

The attraction of nickel to both is that buyers are essentially the same, with companies that buy iron ore also buyers of nickel to make stainless steel.

Rocked To Their Cores

Last week’s dam burst and mudslide at Samarco rocked BHP Billiton and Vale to their cores because both were proud of their safety records but it now appears that the dam which failed had been the subject of an unfavorable stability report about two years before it gave way.

The death toll from the dam failure has rise to nine with 19 people still missing.

But, even as the search continues and accusations are made about unsafe mining practices, the spotlight is switching to nickel once a major profit contributor for both BHP Billiton and Vale but now a problem which needs to be fixed.

50% Of The World’s Nickel Mines Are Losing Money

According to Credit Suisse roughly 50% of the world’s nickel is currently being produced at a loss thanks to the collapse in demand which followed a dramatic slowdown in Chinese steel production.

 “With the current nickel price making half of global production loss-making, supply cuts of 35,000 to 55,000 tons are needed to tighten the market,” Credit Suisse said.

 “When and who is still in question?”.

The answers to those questions, according to the bank, are that the cuts will come sometime by the middle of next year with five projects named as candidates for mothballing — including BHP Billiton’s Nickel West business and Vale’s Goro mine on the Pacific island of New Caledonia.

Other mines which could be hit by cutbacks to remove surplus nickel from a flooded market are all in Australia. Glencore’s Murrin Murrin mine. First Quantum’s Ravensthorpe project and the Yabulu smelter owned by controversial Australian politician, Clive Palmer.

Five Mines Face An Uncertain Future

All five projects mentioned by Credit Suisse are operating at costs above the current nickel price of $4.26 a pound, with Vale’s Goro mine alarmingly close to double that at $8.40/lb and Mt Keith, the biggest mine of several operated by Nickel West, producing nickel at an estimated $6/lb.

With the likely loss of production for several years from the Samarco iron ore project, and heavy costs being incurred as a result of the clean-up and compensation payments, both BHP Billiton and Vale will by urgently seeking savings from elsewhere in their diversified portfolios.

BHP Billiton has been trying to sell Nickel West for the past two years, without success, because nickel is no longer regarded as a core commodity. The current low price means that a business it doesn’t want could incur a loss this year of $386 million, making a shutdown an attractive option despite high closure costs.

Vale is in a different position with Goro because closure of the loss making, 55,000-ton-a-year mine could be the action required to boost the nickel price which will aid the company’s other nickel projects in Canada and Brazil.

Goro Blew Its Budget From Day One

A problem since Inco started construction in 2005 Goro is a mine that had an initial budget of $1.9 billion but ended up costing $6 billion.

Credit Suisse said Vale believes it can drive production costs down from $8.40/lb to $4.50/lb by 2017, but the losses until then will be huge and even at the target cost production would still be below the current nickel price.

All nickel miners have been caught out by the collapse in demand for their metal.

“Stainless steel production in China started the year in growth, but rolled over in mid-year and is now falling,” the bank said.

 “This is a startling turnaround for China’s stainless steel industry which is geared for high growth. In 2014 China’s stainless steel production growth was 9%, and that in itself was a sharp drop from 30% growth in 2013.”

• [Editor:Juan]