Nickel back in the good books

With luck, and despite recent indications to the contrary, Western Australia’s nickel industry could soon emerge as a bright spot in the state’s shell-shocked mining sector.

The key to what is expected to be a sharp increase in the nickel price can be found in a curious combination of events in China, including an elaborate financial fraud, and a sharp rise in stockpiles of nickel in the warehouses of the London Metal Exchange.

In normal circumstances an increase in a stockpile is a negative factor in any market, but in the case of nickel the extra 100,000 tonnes that have turned up at the LME is material moved out of warehouses in the Chinese port city of Qingdao.

It was in Qingdao that a complex double-booking fraud was uncovered earlier this year, when banks found that they had made multiple loans to customers who claimed to own stocks of copper, nickel and other metals and used that as security for a loan.

Criminal activity in the port was assisted by lax bank staff, which did not thoroughly check ownership of the metal or whether it was part of another loan agreement.

Whatever the cause of the Qingdao fraud, the effect has been to distort the nickel stockpile picture, with official LME stocks rising at a time when they had been expected fall because of another event in the market – the Indonesian ban on the export of unprocessed nickel ore used to product a steel-making feedstock called nickel pig iron.

These multiple events in the nickel market (the Indonesian ban and the Qingdao fraud) have sent shockwaves through the industry, with investors struggling to understand how stockpiles of metal, and its price, could be rising at the same time.

One result of the uncertainty was that, between May and a few days ago, the nickel price fell by 20 per cent, taking with it the share prices of WA miners, including Mincor, which dropped from a May high of 98.5 cents to 58 cents last week, and Panoramic, which fell from $1.07 in late July to 64.5 cents last week.

Better times could be on their way, however, because a number of people have started to unravel the puzzle, including analysts at a number of investment banks and at the big Russian mining house, Norilsk Nickel.

According to the head of marketing at Norilsk, Anton Berlin, up to 100,000t of nickel metal has been relocated from Chinese-controlled warehouses to those under the stricter management of the LME.

In effect there is the same amount of metal in the market, it’s just been shifted from a near-invisible status inside fraud-riddled Qingdao to highly visible LME warehouses.

Norilsk’s view of the nickel market is that it is currently in balance, with supply and demand matching, and the price roughly where it should be.

But that is not the view of every nickel-market watcher, with ANZ Banking Group senior commodity strategist Daniel Hynes tipping a big increase in the nickel price next year as demand starts to exceed supply.

He said in a report titled ‘Don’t be fooled by rising nickel inventories on the LME’ that the nickel market was set to tighten considerably next year, with prices rising from their current $US16,305/t to more than $US25,000/t.

Forecasting a nickel price rise of more than 50 per cent is a huge risk for a bank, but the ANZ analyst is basing his optimistic price move on the shift of previously ‘hidden’ metal stockpiles in China to the more transparent stockpiles of the LME.

“The fundamentals remain unchanged,” Hynes wrote. “The market remains on track to move into a sizeable deficit as the Chinese nickel pig iron industry adjusts to life without Indonesian imports.”

The ANZ is not alone in spotting the changes under way in the nickel market, with a big price rise possible next year.

Other banks, including Macquarie, Credit Suisse and UBS, have been dusting off their crystal balls to reveal extremely optimistic price forecasts for WA nickel miners. Panoramic, for example, has a $1 share price tip from all three (implying a 58 per cent increase). Mincor’s top price tip is 90 cent from UBS, up 39.5 per cent.

If the Chinese stockpile relocation theory is correct, and if the Indonesia ban sticks, then a lot changes in WA.

Nicked-exposed towns such as Kalgoorlie will have reason to celebrate, along with investors in nickel-mining companies. The WA government can expect a boost in royalty payments, and BHP Billiton might make a decision on selling (or retaining) its BHP Billiton Nickel West business.

Upside all-round

NICKEL producers are not alone among WA’s resources players to be looking forward to better conditions in 2015 than currently, if only because it couldn’t get much worse.

Iron ore has shown the first signs of a recovery as Chinese steel mills start to re-stock ahead of the northern winter, and LNG exporters got a whiff of better times as another prospective rival started to fade from the new project development list.

Hard on the heels of a Canadian LNG project being dropped because of tough government regulations, the Vladivostok LNG project in Siberia was downgraded by its proposer, the Russian gas giant Gazprom.

The Russian project, which could have threatened Australian LNG exports to Japan and South Korea, is being redesigned as a pipeline development focused on delivering gas to China.

Building a pipeline is easier for Gazprom, which is on a US sanctions list and cannot get access to the specialist equipment needed in an LNG plant, nor can it get access to bank credit lines.

Call for growth

PRESSURE continues to mount at Wesfarmers, with investment banks almost demanding the company do something to deliver growth rather than continue paying out high dividends, which please retirees but do nothing for the future of the company.

The latest collection of bank tips shows a solid wall of ‘sell’ recommendations for WA’s biggest home grown industrial company, without a single ‘buy’ in sight.

Interesting as that is for shareholders in Wesfarmers, the more important point is that the implied criticism of the banks appears to be indicating the end of ‘yield play’ cycle, when companies returned spare cash to investors, and a yearning for a return to a ‘growth and investment’ cycle.