Chinese exports of low-grade nickel pig iron to Japan and India have jumped during January, data shows, as stainless steel producers seek a lower cost alternative in light of sky-high nickel prices and will be more widely in Asia, Macquarie said Monday.

Chinese trade figures show a sharp increase in ferronickel exports, which appear to include output from pig iron, to Japan and India, but Taiwanese stainless steel producers will soon look to import the product as well, Macquarie said.

Record nickel prices have fueled the search for cheaper alternatives in the manufacture of stainless steel, the biggest consumer of nickel. In 2005, small idled steel blast furnaces in China started to produce pig iron with a 3%-4% nickel content, using mostly very low grade nickel ore imports from the Philippines that contain 1%-2% nickel.

Analysts estimate China produced around 30,000 metric tons of contained nickel in 2006, rising to 40,000-70,000 tons in 2007.

Chinese export data for January this year show exports of ferronickel to Japan and India jumping to 1,150 tons, up from 103 tons for 2006 as a whole.

The development of the nascent industry has impressed many analysts with its speed and uptake, with Goldman Sachs JB Were outlining that nickel pig iron could push the global market into surplus by 2008, earlier than anticipated.

"The recorded average unit price of Chinese ferronickel exports into India and Japan fits in with the view that Chinese exports in January were driven by the exports of nickel pig iron rather than nickel ferroalloy with typical nickel content between 20%-40%," Macquarie said in a report.

So far, the use of pig iron in stainless steel has been limited to lower-grade 200 series stainless steel.

But China's Boasteel Group Corp. has confirmed the company is conducting a trial using pig iron in the production of the more widely used 300 series stainless steel.

China's pig iron producer Fujian Wuhang Stainless Steel Products Co. has entered a long-term agreement with Indonesia to buy up to 450,000 tons a month of limonite ore in 2007, Macquarie said.

Shipping volumes from the Philippines in January have been restricted by the rainy season, while in general the large volumes involved in limonite shipping exceed port capacities at times. Limonite ore contains only 1%-1.5% nickel, 40%-45% iron and 30%-35% moisture.

However, nickel shipments from key supplier Philippines will bounce back significantly from the second quarter onward, given the end of the rainy season and the strength of demand for the product from China, Macquarie said.

Nickel prices on the London Metal Exchange have skyrocketed to a record $43,260/ton, up 34% since the start of the year, after more than doubling in 2006.