"I would say it (Japanese demand for nickel this year)will...drop by about 15 per cent, or some 30,000 tonnes," Hirosuke Chihara, general manager of Sumitomo's nickel and chemical department, told Reuters in an interview.

Earlier on Wednesday, Japan's biggest nickel producer said it would cut its nickel and ferro-nickel output by 10 per cent in 1998/99 ending March 31.

It cited steep production cuts by domestic stainless steel makers, noting Japan's stainless steel output would fall by more than 15 per cent in calendar 1998.

The announcement followed news on Tuesday that Australia's WMC Ltd was reducing output by 10,000 tonnes at its three mines due to low world nickel prices. WMC's move gave a boost to nickel prices on the London Metal Exchange overnight.

Sumitomo Metal usually importsnickel matte from WMC in Australia and PT International Nickel Indonesia for nickel production, while buying raw material for ferro-nickel from Indonesia and New Caledonia.

"There are the problems of anti-dumping duties and the Japanese economy. And the export business is not faring well at all," Chihara said. "It will take time before the Japanese stainless industry recovers."

In September, a US trade agency ordered anti-dumping duties on stainless steel wire rod imports from six countries, including Japan, agreeing with the US industry that it was being hurt by imports sold at less than fair value.

The decision has dealt a severe blow to Japanese stainless steel producers, which need to export about 30 per cent of their output. They had been increasing exports to the United States to partly make up for slack business in Southeast Asia.

Official data showed Japan last year consumed 198,349 tonnes of nickel, including ferro-nickel, nickel powder and nickel oxide sinter. Of the total, about 80 per centwas used by stainless steel makers, who churned out a record 3.25 million tonnes of hot rolled products.

Chihara said with nickel prices on the LME hovering close to $4,000 a tonne -- near their lowest level since 1987 -- Sumitomo Metal was among those struggling to cover production costs.

"At these price levels, I don't think there are any producers that can fully cover costs," Chihara said. "Also in terms of covering cash costs, I think less than 20 per cent of producers can cover costs. We aren't one of them."

However, depending on whether three new Australian mines manage to stick to their schedule, the global nickel market may fall into a supply deficit next year as more traditional producers resort to production cuts, he said.

"On the supply side, Russian supply is not really rising. Production cuts by western producers are spreading," he said. "If the new projects in Australia cannot start as scheduled, we may see a deficit next year. We have to wait and see." Later this year, Australia'sBulong, Cawse and Murrin Murrin mines are expected to start operation.