Price fall hampers Nickel West sell-off

Prices for key stainless steel ingredient fell heavily as soon as BHP put assets on market.

BHP Billiton’s now public plan to sell off its Nickel West business in Western Australia has not got off to an ideal start, with prices for the key stainless steel ingredient falling heavily within hours of BHP informing its workforce that would-be buyers would soon visit the operations.

Nickel dived 4.7 per cent to $US9.06 a pound in overseas markets. The plunge was put down to the speculative rush into the metal running out of puff rather than BHP’s sale plan indicating it was calling the top of the market in the “devil’s” metal.

The price is nevertheless up by one-third on last year’s (calendar) average of $US6.82 a pound. It is also up by 14 per cent on the 2012 average of $US7.96 a pound. Even so, the price remains well below the bonanza level reached in March 2007 of $US20.36 a pound — highlighting nickel’s status as the most price volatile of the base metals.

That fact plays to the situation where estimates for a sale price for Nickel West vary widely from as little as next to nothing up to $US2 billion ($2.1bn). What is known is that Nickel West’s earnings are highly leveraged to nickel prices.

It lost $US314 million in the 2013 financial year (nickel averaged $US7.50 a pound) but two years earlier when prices averaged $US10.90 a pound, it posted a profit before interest and tax of $US354m.

BHP’s president of the 100,000 tonne-a-year Nickel West business, Paul Harvey, told the workforce on Wednesday that the business of mines, concentrators, a smelter and a refinery could be sold in part or in full. “We will shortly be inviting third parties to visit our operations,’’ Mr Harvey said in an internal memo.

UBS analyst Glyn Lawcock said the decision to sell was no surprise given it is a non-core asset but that the market had been expecting it to be included in the demerger option.

In that option, nickel would have been bundled off with aluminium, manganese and South African coal into a new company.

“Perhaps the dynamics in the nickel market around Indonesia and the subsequent rise in the nickel price has flushed out buyers. Perhaps, given Nickel West is housed in BHP Ltd and not Billiton plc, a demerger of Billiton owned assets in the UK is easier to achieve,’’ Mr Lawcock said.

Standard Bank said that the nickel market was looking overbought from a technical perspective.

“The metal is retracing and trying to find its feet for another push higher. During this process, however, weaker shorts are heading for the exit, while some wider profit-taking may also be having an effect,’’ the bank’s commodities desk said in a research note.

Nickel’s recent price strength is a result of Indonesia’s ban on the export of unprocessed laterite nickel ores, a cheaper nickel unit alternative in steel production than higher grade intermediate nickel products produced from sulphide ores.