With the price of nickel down around 7 percent and year-end stocks in LME warehouses at their highest levels since May, investors in the base metal were hard-pressed to find good news in 2012. However, price-positive developments could be around the corner, according to analysts, who predict that the surplus of mined nickel forecast to come onto the market from China and elsewhere is overblown.
A recent report from Citi Research states that “fundamentally misunderstood” nickel suffers from a “reputational deficit amongst many in the analytical community” because of assumptions made about its oversupply.
These assumptions include the fact that every year for the past five years, a “wave of supply” has been due to hit the nickel market — however, that wave has failed to materialize, mostly as a result of failed production estimates.
Underperforming nickel assets in 2012, notes Citi, include Vale’s (NYSE:VALE) 53,000-tonne-per-annum (tpa) Onca Puma ferronickel operation, which needs a complete furnace rebuild and is unlikely to restart until mid-2013; Anglo American’s (LSE:AAL) 40,000-tpa Barro Alto ferronickel operation, which suffered a kiln sidewall collapse in October; and up to 50 percent of Chinese nickel pig iron production reportedly being shuttered due to low nickel prices.
In addition, Russian miner Mechel (NYSE:MTL) said just before Christmas that it will be closing its South Urals nickel plant due to a “slowdown in demand for the metal and what the company regarded as a ‘bleak’ outlook for price recovery in the near future,” reported The Australian.
As a result of this “supply failure,” as well as other factors, including low stainless steel inventories in Europe and China (nickel is a key ingredient of stainless steel), Citi expects nickel to rally to $21,000/tonne in the first quarter of this year — a 19-percent increase over the current LME price of $17,540/tonne. The research group expects nickel to average $21,770/tonne in 2013 and rise to $24,400/tonne in 2014.
Of direct relevance to nickel investors, another research firm, UBS, said now could be a good time to pick up undervalued coal and nickel stocks whose prices are trading “close to spot and marginal costs.” As reported by Reuters: ”[t]he research house’s top picks included state-owned coal miner PT Bukit Asam (OTC Pink:TBNGY) and nickel producer Vale Indonesia (OTC Pink:PTNDY) as they are high-volume growth miners with sector-low cost bases.”
Cuban nickel plant closes
Steel Guru reported that Cuba has closed the oldest of three nickel plants in the country. The news outlet quotes a communist party official in Eastern Holguin, the location of the plant, as saying that, “[t]his plant’s productive role is completed and now it will dedicate its efforts to services.” Nickel is Cuba’s most important export and is a top earner of foreign exchange. Steel Guru reported that the island nation produced 69,700 tonnes of raw nickel plus cobalt in 2010.
Canada-based Sherritt (TSX:S)produced 34,572 tonnes of nickel and 3,854 tonnes of cobalt in 2011 through the Moa joint venture, a nickel-cobalt mining operation owned by subsidiaries of Sherritt and Cuban company General Nickel Company (GNC).
First Quantum Minerals (TSX:FM) announced in the middle of December that it is moving forward with its third nickel mine, Enterprise, as part of an $840-million expansion plan in Zambia.
The Toronto-based company said it expects Enterprise to be a low-cost producing mine given synergies with its Sentinel copper mine.
“The 4.0 Mtpa processing plant that will be built at the Sentinel facilities will consist of straight forward crushing, milling and flotation. The plant will be designed with the flexibility so that if nickel ore from the Enterprise is not being processed, it can be used to augment the Sentinel copper throughput capacity by approximately 4 Mtpa,” First Quantum said in a statement.
In December, world’s largest nickel producer, Norilsk Nickel (LSE:MNOD), experienced its largest drop in a month due to investors betting that the company will pay lower dividends than expected. Bloomberg reported that Norilsk stock retreated up to 3.3 percent before closing down 2.1 percent on the Moscow stock exchange.
Number-one iron ore producer Vale said last month that it will take a US$2.85-billion pretax writedown on Onca Puma. The announcement came after the Brazilian ferronickel operation was stopped in June and nickel prices declined. Vale also announced a before-tax impairment charge of $1.3 billion at Hydro, a Norwegian aluminum producer in which Vale has a 22 percent stake.
The merger of Glencore International (LSE:GLEN) and Xstrata (LSE:XTA) could result in more M&A activity in the West Australian nickel sector, reported The West Australian newspaper, quoting the CEO of Western Areas (ASX:WSA) — the country’s third-largest nickel producer. Dan Lougher said the $31-billion tie up announced in November “could be the catalyst for a wave of acquisition activity in the WA nickel sector this year, with the new global giant primed to gobble up a number of local assets.”
Securities Disclosure: I, Andrew Topf, do not hold equity interests in any of the companies mentioned in this article.