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Bearish Outlook For Nickel

Commodities | May 18 2017

Nickel prices are falling amid expectations for renewed exports from Indonesia and the Philippines. Brokers observe the outlook for nickel has turned quite bearish.

-Demand for industrial metals expected to slow in China amid renewed focus on consumption
-Nickel pricing facing greater downside risk from strong supply response
-Chinese stainless steel production expected to fall


By Eva Brocklehurst

Brokers observe nickel ore prices are falling amid expectations for renewed exports from Indonesia and the Philippines reaching China by the start of June. Prior to May, Citi notes Chinese nickel ore prices had been on a robust rising trend since the start of 2017, in contrast to nickel metal prices, as the former was supported by a rapidly dwindling Chinese nickel ore stockpile.

With the political hurdles being largely removed from both Indonesia and the Philippines and exports resuming or increasing, this is now expected to reverse and nickel ore prices are tumbling. Compounding the negatives for nickel, demand for stainless steel in China is now weakening.

Commonwealth Bank analysts expect demand for nickel will remain supported in the near term as Chinese policy should shore up growth before elections later this year. In particular, infrastructure construction and manufacturing should be solid. After the elections, the analysts expect policy makers will renew the focus on structural reform and moving the economy towards consumption and services.

In this environment, demand for industrial metals should slow. Therefore, supply-side factors should provide the main differentiator among industrial metals. Hence, those metals experiencing strong supply responses, such as nickel, to the March quarter lift in prices will face greater downside risks relative to others.

Nickel prices have now moved lower because of growing concerns about a surplus. Expectations for a surplus rose after a surprise reversal of the Indonesian mining laws in January. Producers that have committed to build smelters in the next five years are now allowed to export any excess low-grade nickel ore. This amendment potentially adds up to 4% to supply, the analysts suggest.

Delays surrounding the closure of Filipino nickel ore mines, and questions over whether these will actually occur, are also affecting the outlook. The Philippines accounts for around 20% of global nickel ore capacity and around half the nations nickel output appeared at risk of closure.

Mine suspensions, alongside unfavourable weather and maintenance, meant Filipino nickel production fell -47% in the March quarter.

Nevertheless, the directive to close mines is now under review following an appeal by miners, while the minister instigating the crackdown, Gina Lopez, failed to win approval to retain her position. The CBA analysts expect nickel prices to track lower over the next year.

Negative Trend

Citi notes nickel prices have been under pressure for some time by the growth of nickel pig iron production, since a peak in 2007 that sent prices close to US$52,000/t. The broker concurs that the combination of of Indonesia's surging domestic nickel pig iron production and the partial export reversal, as well as the removal of Gina Lopez as Filipino environment minister, has left the market severely dented from a sentiment point of view.

For the first time since a negative price trend was established in the second half of 2007 the broker envisages little opportunity for a significant and sustained rally in nickel either in the short or long-term.

The broker observes most Filipino mines have continued to operate despite the threatened suspension while a re-audit of the Gina Lopez audit has begun, bringing further questions regarding the likelihood of significant mine closures.

Ore shipments to China from Indonesia and the Philippines, plus surging Indonesian nickel pig iron production, are expected to push Asian nickel pig iron/ferronickel production to 760,000 tonnes this year, up 20%. Citi suspects this, effectively, means the market averts a deficit. The broker's next downside short-term price target is set at US$8,500/t.

Stainless Steel

Macquarie observes both stainless steel production trends and raw material supply are conspiring to push the nickel price down. Having benefitted most from the industrial re-stocking over the past nine months, stainless steel is now suffering the most as the cycle reverses. Macquarie expects Chinese output to be down -7% in the June quarter.

With plenty of ore from both Indonesia and the Philippines and the ramping up of Indonesian nickel pig iron output there is no shortage of supply available to the stainless steel industry in China.

As the London Metal Exchange nickel price is currently around US$9,000/t Macquarie believes much of the market weakness is priced in, but supply reductions need to follow, which are most likely to come from Filipino ore. Macquarie reduces 2017 nickel price forecasts by -14% and lowers future years by -7-10%. The broker lowers its long-run price estimate by -13% to US$13,000/t.

The impact on Australia's nickel miners is such that Macquarie downgrades its outlook for both Western Areas ((WSA)) and Independence Group ((IGO)). Earnings estimates are downgraded -30-50% and -10-20% and the rating for the stocks reduced to Underperform and Neutral, respectively.

Under a more bearish price outlook, the broker calculates the Western Areas Cosmos development generates an internal rate of return of 14% while the mine life at the Independence Group Long nickel mine is reduced by a year.

The broker also reduces the expected contribution to earnings from the South32 ((S32)) Cerro Matoso nickel mine by -30%. At the BHP ((BHP)) Nickel West project cash losses are expected to continue.

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