Base Metals

Cormark Securities is positive on base metals as a whole. However, the firm admits that the strong US dollar is “likely to keep pressure on commodities” in the near term, and its nickel outlook is more cautious than optimistic.

In the latest Base Metals Monthly update from Cormark Securities, the firm looks at what’s been going on in the nickel space as well as what’s in store for the near term.

To be sure, the firm is positive on base metals as a whole. While the S&P/TSX Global Mining Index (INDEXTSI:TXGM) leveled in February, a closer look from Cormark reveals that a rebound in base metals stocks was offset by weakness from the gold space.

However, the firm admits that the strong US dollar is “likely to keep pressure on commodities” in the near term, and its nickel outlook is more cautious than optimistic.

For starters, Cormark points out that prices for the base metal hit their lowest level in more than a year in February, with inventories on the London Metal Exchange continuing to hit all-time highs. In the past three months, prices have fallen about 15 percent, to $1.14, despite earlier predictions that nickel could hit a deficit this year.

“Prices are essentially back to their 2013/14 lows prior to the implementation of the Indonesian ore export ban,” the note reads.

Certainly, as those following the space will know, Indonesia implemented its much-anticipated nickel export ban at the start of 2014, and that was initially a boon for the nickel price. However, output from the Philippines quickly ramped up to close the gap, and lower demand from China also put a damper on the metal last year.

Some market watchers might still be holding out hope for the export ban to have more of an effect, but Cormark isn’t so sure. “While many in the market continue to expect the Indonesian ore ban to finally start impact the market in 2015, we question how much this will drive prices,” its note states. “Given ample inventory, new supply and weak demand we caution investors not to get too aggressive in their outlook.”

The firm also points to healthy production numbers from some of the world’s larger nickel miners. Vale’s (NYSE:VALE) Onca Puma “produced a monthly record in December,” and is expected to increase production 20 percent year-over-year for 2015. On a similar note, Glencore (LSE:GLEN) reported 12,600 tonnes of nickel production from its Koniambo operations last year, up from 1,400 tonnes the year prior.

That said, it isn’t all bad news. Cormark also notes that Koniambo was “suspended in late December after a metals spill damaged the plant” (although it adds that production was expected to drastically increase again this year, to 25,000 to 40,000 tonnes, prior to the accident).

Furthermore, Cormark notes that “[l]aterite imports from the Philippines continue to follow [their] seasonable patterns,” meaning a pullback in the production of nickel pig iron. “As ore inventories are drawn down in China, some tightening of the market is expected,” it explains, although it only sees that happening until production in Indonesia starts to recover.

Overall, it’s clear that Cormark isn’t expecting a break-out performance from nickel in the near term. “In 2015-16, we expect new supply ramping up to offset the slowdown in NPI production to a degree, limiting a material price rise,” it says in its note. “Beyond that, we see little to stop investment in Indonesia replacing the NPI production lost in China which should keep a cap on prices.”

Certainly, nickel bulls will be waiting a little longer and will be keeping an eye out for a change in the trade winds.

Cormark also provides its latest ratings and price targets for a number of base metals companies in its note, and despite its outlook for nickel, there are a few nickel companies with positive price targets in the mix. The firm rates PolyMet Mining (TSX:POM,NYSEMKT:PLM) a “buy” with a price target of $2.20, and has given Sherritt International (TSX:S) a “buy” rating and a price target of $4.

 Analyst certification as stated in Cormark’s note: “We, Cliff Hale-Sanders and Alec Meikle, hereby certify that the views expressed in this research report accurately reflect our personal views about the subject company(ies) and its (their) securities. We also certify that we have not been, and will not be receiving direct or indirect compensation in exchange for expressing the specific recommendation(s) in this report.”


Securities Disclosure: I, Teresa Matich, hold no direct investment interest in any company mentioned in this article.


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