Nickel Price Hike Likely

This story features IGO LIMITED. For more info SHARE ANALYSIS: IGO

-Chinese are diversifying sources
-Using nickel metal in pig iron
-And stainless steel production rises
 

By Eva Brocklehurst

Nickel has a new geography to occupy brokers. The Philippines. The new government is enacting a nationwide audit of mining areas for compliance with international standards, and the scrutiny may constrain or reduce the nickel ore export trade. With Indonesian exports of nickel ore being out for the count, this added supply risk from the Philippines has potential to procure a long-awaited lift nickel prices, brokers observe.

The Philippines nickel ore trade is around 20% of global mined supply and most is exported to China as low-grade laterite ore for feed into nickel pig iron production. The issue here appears to be environmental protection, rather than, as was the case in Indonesia, a strategic goal to create downstream processing inside the country.

Nickel spot pricing has lifted by around 10% to US$4.46/lb, partly attributable to the emerging supply risk but, UBS asserts, is not yet at a level which would place the industry back on a sustainable footing, although the situation in the Philippines deserves to be closely monitored. Cash losses are still accruing for many producers and spot pricing remains below the marginal cost of production.

UBS calculates this to be around US$4.50-5.50/lb based on high pressure acid leach producers. The broker believes around a third of nickel mines globally are loss-making, yet the industry has been slow to idle capacity.

Nevertheless, the case for upside is not just about supply. Demand is also recovering as stainless steel consumption in China lifted 5.7% in the year to May, with a mix-shift to nickel-bearing product. The broker suspects restocking in stainless steel is also a source of potential upside.

Hence, the best placed equities are those which have positive cash flow at the current depressed prices. UBS believes Norilsk is well positioned as the lowest cost global producer but Independence Group ((IGO)) is also favoured for its Nova project, which has break-even costs of US$2/lb when fully ramped up. Production begins at the end of this year.

Morgan Stanley estimates nickel markets could become bullish on the back of the Philippines developments, contending that, despite 30% of supply being loss-making and the market over-supplied, production was pared back just 5%. Why? Most of the nickel mines are large assets, such as Murrin Murrin and Ravensthorpe, which are owned by global corporations, well able to ride out the price weakness. Now this waiting game may actually deliver.

Meanwhile, established Philippines miners such as Coral Bay Nickel and Taganito Mining are expected to meet government-imposed industry standards, while around another 300,000 tonnes per annum is exposed to cuts which is estimated to be 15% of global supply. As a result, Morgan Stanley lifts its forecast deficit and expects upside risk to the price outlook.

Philippines nickel exports were already down more than 30% in the first half of the year, Macquarie notes, mainly from weather-related disruptions. Still, these political developments may matter for nickel.

Around 400,000 tonnes of nickel ore were exported from the Philippines last year to finished nickel producers in Australia (QNI, closed in 2016), Japan (three ferronickel producers) and China (nickel pig iron producers). In addition, 51,700t of nickel in nickel/cobalt sulphides were produced at two plants in the country for export to Japan for processing into nickel metal.

The main issue for the buyers of nickel ore from the Philippines is the seasonality of supplies, because of the rainy season which runs from October to March when exports fall sharply because of the difficulty in sustaining operations in heavy rain. Ore buyers traditionally need to build up large stockpiles ahead of this period but Macquarie wonders whether this will be possible in the coming year.

The main challenge for the Chinese pig iron producers is that up to 2014, they only relied on Philippines ore for low grades. Most of the feed for electric furnace production came from Indonesian high-grade ore. Now this material has dried up. Stocks of nickel ore in China are now considered too low to sustain production at recent rate and producers have started to diversify feed sources.

Macquarie suspects the nickel pig iron industry could obtain greater proportions of its feed from nickel metal. This may explain why Chinese imports of nickel metal have risen this year. Regardless, the broker does not expect any significant improvement in Chinese nickel pig iron production from a projected level of 354,000 tonnes this year.

Nevertheless, the broker agrees the surge in stainless steel production has supported China's primary nickel consumption and expects total stainless steel production will grow 3.9% in 2016. Macquarie does not believe further major closures in nickel capacity are likely and, bringing together supply/demand estimates, a deficit of 110,000 tonnes is expected this year and 71,000 tonnes next year. This should support higher prices than in the recent past.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms