Clive Palmer's gift to the nickel market

Nickel prices could benefit from recent project closures - and the future of Clive Palmer's Yabulu refinery is key.

Summary: If administrators decide to close Queensland Nickel’s Yabulu nickel refinery, which looks likely, it could mark the start of a number of other nickel projects reaching closing point. If Yabulu shuts, it will mean collectively five per cent of the world’s annual nickel supply will have been removed from the market, through this and other project closures.

Key take-out: If nickel operations close and the metal outputs from those companies are removed from the market, we may see a spike in prices later in 2016.

Key beneficiaries: General investors. Category: Commodities.

It is mired in politics and dominated by the powerful personality of Clive Palmer, but when the fate of the financially troubled Queensland Nickel project is decided, it could signal a turning point for the mining world’s most dynamic, but currently depressed, metal.

If the administrators of Queensland Nickel decide to close the 40 year-old Yabulu refinery, the company’s key asset, then around 30,000 tonnes of annual nickel production will be removed from the market.

The fate of the refinery, located close to the north Queensland city of Townsville, was plunged into uncertainty late last month when Queensland Nickel went into voluntary administration, unable to service a debt load estimated to be more than $100 million, or meet the demands of an estimated 1500 creditors.

A decision on the future of the refinery is expected in the next few weeks and while closure looks likely, nothing can be taken for granted where Palmer is involved, either in business or politics – given his position as a lower-house member of the Australian Parliament representing his Palmer United Party (PUP).

The corporate structure wrapped around Yabulu, and the potential $1 billion environmental clean-up cost if it is closed, represent significant problems which could prevent closure, with continued operations a way of staving off the clean-up which might become a government responsibility, given the refinery’s proximity to the Great Barrier Reef.

However, the financial pressures and ongoing investigations into the operations of the refinery, and its links to PUP, make closure seem likely, leaving the clean up to someone else.

From a commodity-market perspective, losing Yabulu alone might not mean much because it would only remove 1.5 per cent of annual global production of around two million tonnes of nickel.

However, Yabulu closing would be another straw on the camel’s back because it is not the only nickel project on the cusp of closing, or to have reached the closure point.
Over the past few weeks a series of nickel projects in Australia and overseas have succumbed to the 10-year low in the price of nickel, which has dropped below $US4 a pound. This is largely because of reduced demand from the Chinese steel industry, which uses nickel to make stainless steel.

The local losses include 10,000 tonne-a-year mines operated by Mincor and Panoramic Resources, but the biggest closure was of the Niquelandia mine of Votorantim Group in Brazil, which had been producing 44,000 tonnes of nickel a year until closing its doors last week.

Collectively, if Yabulu shuts in the next few weeks, the recent crop of closures represent close to 5 per cent of the world’s annual nickel supply, a proportion which is potentially meaningful to the price of a metal which only a few years ago was trading at $US13/lb, and has hit $US20/lb when in short supply.

At less than $US4/lb, most nickel producers are under extreme pressure. Long standing chief executive of Panoramic, Peter Harold, estimates that between 70 per cent and 80 per cent of the world’s nickel production is currently loss making.

In Australia alone there are three of the world’s biggest nickel mining and processing operations feeling the pressure. They are:

·      BHP Billiton’s Nickel West business, which was for sale until last year but failed to find a buyer.

• First Quantum’s Ravensthorpe mine (a former BHP Billiton project) which is producing unprofitably and for sale, and

• Glencore’s Murrin Murrin Mine, which is also under financial pressure and could be one of the assets the financially-stressed owner might sell if a buyer could be found.

For investors with an eye on recovery situations, the position with nickel is both predictable and repetitive.

Predictable in that mine closures are starting to do the job of cutting supply which will, in turn, lead to a reduction in stockpiles built up during a time when the commodity cycle was expected to be stronger-for-longer thanks to Chinese demand, which has peaked, and might be in decline.

Repetitive in that nickel has historically been a cyclical metal prone to extreme highs and lows, This is one of the reasons BHP Billiton has been extricating itself, preferring to focus on what its management team believes are the more predictable cash flows of iron ore, oil, coal and copper – a view which is being challenged in the current commodities market.

What the history of nickel, and the current crisis enveloping the business interests of Palmer means, is that removing high cost metal from the market clears the way for survivors to prosper, especially if the cuts are too deep and the nickel price spikes sharply higher, as has happened many times in the past.

As a trading opportunity, the position with nickel is becoming quite interesting, and should become clearer in the next few weeks.

Some investment banks believe that nickel, which was first into the metal-market crash, could be first out, though they want to see promises of supply curtailment actually delivered.

Grant Spore, a research analyst at Deutsche Bank, said last week that the market would remain sceptical until there was tangible evidence of supply cuts.

“This may take a few months, but we continue to think that nickel is one metal which could see a supply driven recovery in 2016,” Spore said.

Removing Yabulu’s metal from the market would be the next step in a process, which could also include the loss of metal from Ravensthorpe, Murrin Murrin, and/or Nickel West, leaving Russia and Indonesia as the dominant suppliers.

If that train of events occurs, then a nickel-price spike could be on the way later this year with a number of ASX-listed stocks are potential beneficiaries:

• Western Areas and Independence Group, two remaining ASX-listed low-cost producers.

• Windward Resources and Talisman Mining, explorers and potential mine developers.

• Mincor and Panoramic, which could quickly return to production if the nickel price rises.

You can view analyst consensus views of nickel producers in today’s edition of Collected Wisdom (see the article here: Collected Wisdom, February 4, 2016).