Politics propels the devil's metal

It’s easy to think that this week’s sell-off in minerals and metals which trashed the price of iron ore and copper was an industry wide event, but that would be wrong because one metal swam against the tide as it often does; nickel.

While the copper price was falling from $US3.21 a pound to $US2.95/lb, and iron ore was falling from $US115 a tonne to $US104/t nickel rose from $US6.41/lb to $US7.08/lb.

The up/down difference was reflected in share price moves with most copper and iron ore stocks dropping sharply and most nickel stocks holding their ground.

Examples of the copper slide include OZ Minerals falling by 15% to a Wednesday low of $3.44 before recovering slightly, and Sandfire Resources falling by 13.5% to a Wednesday low of $5.39 before also recovering some of the lost ground.

Leading nickel stocks also suffered in the near-panic conditions early in the week but most of the pure-play nickel producers recovered later to be close to where they started.

Western Areas, the leading mid-tier producer, opened the week at $3.61, fell to $3.29 and rebounded to $3.45 for a 4.5% loss. Sirius, the leading explorer, opened the week at $2.77, fell to $2.39 and quickly rebounded to $2.72, for a marginal 1.8% decline.

What the markets are telling investors is that the forces affecting nickel are different to those affecting most other minerals and metals and while that looks encouraging there are reasons to remain cautious about nickel which retains its title of “the devil’s metal” (as Eureka Report described it last August).

Back then, hopes had been raised that a keenly-awaited recovery in the nickel price was underway after three years in a doghouse called “chronic over-supply”.

The nickel price in late August had just hit $US6.71/lb, its highest for several months, and investors were re-discovering their interest in one of Australia’s early boom-time metals via the exciting discoveries of Sirius Resources and other explorers in the Fraser Range region of WA.

But, as was cautioned seven months ago nickel proceeded to disappoint with the August price bounce proving to be just one of three false dawns which can be clearly seen on a one-year graph of the price.

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The question now is whether the move back above $US7/lb for the first time in 11 months is the start of a sustained recovery and the only answer, no matter how much it annoys you to hear is: “perhaps”.

The problem with nickel today is that its underlying problem of over-supply has not gone away. Stockpiles held in the warehouse licensed to the London Metal Exchange remain close to a five-year high of 270,000 tonnes and while there are hints of a peak being reached in the pile of unsold nickel there is no guarantee that’s the case.

Rather than an increase in demand being responsible for the nickel price rise the causes are entirely political with an Indonesian Government ban on the export of unprocessed nickel ore appearing to be having an effect on Chinese users of the material and with some metal traders wary of Russia adding nickel to gas as a commercial weapon to use in its disagreement with the western world over Ukraine.

Collectively, Indonesia and Russia supply the lion’s share of the world’s nickel which is almost entirely consumed in the production of stainless steel.

Some observers of the nickel sector believe they can detect a significant change in the market, including Macquarie Bank which reckons the world is facing a “massive shortage if the Indonesian ban is fully enforced” – a very big if.

Macquarie’s optimism bubbled over in its assessment of the nickel market, generating some optimistic forecasts that include nickel averaging close to $US8/lb next year and $US9lb in 2016.

There is even reference to how nickel reacts in a genuine boom when serious shortages of the metal develop such as that which might occur should the Indonesia export ban become a permanent feature of the market.

If there is a full ban, Macquarie reckons: “a massive nickel deficit would start from the end of 2014 onwards and that by 2016, London Metal Exchange inventories would be lower than in 2006-07 when nickel prices were trading in the $US20,000/tonne to $US50,000/t ($US9/lb to $US22/lb) range.

One company which does not appear to be subscribing to optimistic views such as those from Macquarie is BHP Billiton which is trying to sell its major nickel business, Nickel West.

Formerly the nickel division of Western Mining Corporation, Nickel West is a big business, producing more than 100,000 tonnes of the metal annually – but it is old and marginally profitable.

A new owner might be able to revitalise Nickel West but the fact that BHP Billiton is exiting the nickel industry is a powerful comment on what it sees as the long-term future of a metal suffering from chronic over-supply.

For speculators the scene has been set for a few interesting months as Indonesia moves close to its presidential election scheduled for mid-year.

The ban on the export of unprocessed ore is currently very popular because of a view that too much value is being lost by selling low-value material worth a few dollars a tonne when nickel metal fetches thousands of dollars a tonne.

However, forcing the closure of the ore-export business is having an effect on the regions where it had become an important business and job creator with few signs yet that anyone is prepared to invest the hundreds of millions of dollars required to upgrade ore to something of greater value.

After the presidential election there is a chance that the export of unprocessed ore will re-start, leading to a fresh flood of surplus nickel.

With so much riding on the outcome of political events in Indonesia and Ukraine it would be wise to see the nickel sector as an interesting opportunity, but not one to be rushed.