02/07/2015 - 13:03

Miners, banks at odds over nickel

02/07/2015 - 13:03


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Most investors have given up on iron ore, recognising it as a game that can only be played by the biggest mining companies.

DROP: Nickel prices have fallen 40 per cent during the past 18 months.

Most investors have given up on iron ore, recognising it as a game that can only be played by the biggest mining companies.

However that’s not the case with another specialty Western Australian metal on which big bets have recently been placed, despite few signs of a price recovery – nickel.

Three deals stand out as indications of optimism for a future upward move in the nickel price; and if that optimism is correct, then there will be celebrations at Western Areas, Talisman Mining, and Independence Group.

If misplaced, then another important part of WA’s mining industry could join iron ore in a painful period of mine closures, job losses and tumbling share prices, which is the last thing the state needs after the iron ore crash.

From a market analysis perspective what’s happening is quite interesting, because the corporate deals that have made nickel a local newsmaker do not reflect the nickel market, where the price has recently been testing a six-year low thanks to supply flooding demand.

On the London Metal Exchange this week, nickel dropped below $US11,700 a tonne, close to 60 per cent down on the price of late 2010 and 40 per cent less than the price of 18 months ago.

Examined any way you like, price falls of that magnitude spell trouble for nickel mining companies, even if there is a currency boost for Australian producers from a falling exchange rate.

Against this background of a market oversupplied with nickel – courtesy of strong shipments of low-grade material from Indonesia and the Philippines to China –the recent outbreak of Australian nickel industry deal-making has been widely interpreted as jockeying for position ahead of a sharp price rise.

However, the falling nickel price and the rising level of nickel deal-flow is so starkly different that it’s easy to say that someone is getting it right and someone is getting it wrong.

Given what’s happened in iron ore, where the price is said to be sliding back into the $US40/t range (and perhaps lower), it is hoped that the collapse in the nickel price will soon be reversed.

In theory, a recovery could be on the way, though it’s also worth noting that investors have heard that promise at least three times in the past few years.

Previous assurances that the worst is over for nickel were based on an assumption that Chinese demand for stainless steel (the primary use for nickel) would remain strong, and that an Indonesian ban on the export of unprocessed nickel ore would lead to stronger demand for the sort of finished product supplied by Australian mines.

Unfortunately, demand for Chinese stainless steel has slowed, and even though shipments of unprocessed ore from Indonesia and the Philippines appears to have declined, there are still huge stockpiles of nickel in China.

Some well-placed commodity market analysts think an improvement in the nickel price is on the way, but it will take more time.

Analysts at investment bank UBS can see signs of a price rebound in the next few weeks by scrutinising inventory flows and noting how the owners of metal are taking delivery of material being held in warehouses; a process known as cancelled warrants, which are close to a record high.

“The last time cancelled warrants lifted like this was in the first half of 2014, a precursor to a speculative nickel price rally of around 50 per cent to $US9 a pound ($US19,800 a tonne),” UBS said.

Citi, another investment bank, is more cautious, telling investors last week that it believes there is little prospect of a sustainable nickel price, or stainless steel stocking upturn over the next two months, which includes the July-August holiday period in the Northern Hemisphere.

JP Morgan, a third investment bank with a sobering view of nickel, is concerned about the fundamental measures of sluggish demand and high levels of supply, adding that it was “more comfortable with nickel at $US10,000 a tonne than it was with a price of $US17,000” – a hint that the price could continue falling.

It is against warnings like that from investment banks that Independence has paid a high price to merge with Sirius, Talisman has acquired the mothballed Jubilee nickel mine, and Western Areas last week agreed to pay $25 million for the mothballed Cosmos nickel mine.

Each deal is a sign that management of the companies doing the buying is getting ready for a nickel price revival, and that the bottom of the market is imminent.

If they’re right, then WA’s nickel industry is set for a substantial resurgence.

If they’re wrong, then the shareholders of Independence, Talisman and Western Areas will have to continue waiting for the overdue arrival of a nickel-price upturn.


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