The devil’s metal

Nickel is living up to its name as the devil’s metal, and investors should be very careful.

Summary: The nickel price jumped strongly over the last month, taking nickel stocks with it, but just as quickly it fell, leaving investors to rub their heads. The main reason: there’s no shortage of supply, and the global stockpile is already swollen.

Key take-out: The supply surplus, which could last for years, and the associated low nickel price make it difficult to recommend any ASX nickel stock as a buy.
Key beneficiaries: General investors. Category: Commodities.

Hopes were raised last week that an overdue recovery in the price of nickel would follow the revival in another key industrial metal, copper. But after producing some of the strongest share price rises on the ASX, the nickel bounce has proved to be short-lived.

Chronic over-supply is what dogs nickel, and until significant production cuts are made by the major producers nickel is condemned to be a long-term disappointment and a commodity to avoid, along with the companies that mine it.

That did not seem to be worrying investors last week as they rushed to buy shares in nickel miners such as Mincor (MCR) and explorers such as Sirius (SIR).

In a burst of enthusiasm that followed a 10% rise in the price of nickel from around $US6.10 a pound in late July to $US6.71/lb last Thursday, Mincor rocketed up by 50% from 49c to 74c, and Sirius added 24% from $2.29 to $2.84.

The sharp share price rises reflected a view that nickel is overdue for a price recovery after having fallen for almost three years from the $US13/lb it reached in late 2010.

But there is a good reason for nickel suffering a prolonged period of low prices, and that is the problem of supply exceeding demand by a wide margin. This has led to a situation where an estimated 50% of the world’s nickel mines are losing money at current prices.

A nickel mountain

It was the nickel mountain in warehouses around the world that killed last week’s stockmarket revival, including a 3,000 tonne addition last Friday to the already swollen stockpile at the London Metal Exchange.

That addition of the metal lifted the LME nickel reserve to more than 208,000 tonnes, almost double the level at this time last year, and sparked a retreat in the nickel price back to $US6.46/lb.

For investors, the rising stockpile is a warning that while nickel can be a meteoric metal delivering spectacular price spikes, which have seen it soar beyond $US25/lb in boom years, it can also live up to its nickname of the “devil’s metal” or “devil’s copper”.

That label was applied by German scientists in the 18th century (they called it “kupfernickel”) because it was difficult to separate from copper, which is sometimes mined in association with nickel.

It remains a difficult metal, though more for investors than miners, and is likely to stay that way for several years. That means any entry into the nickel-mining sector should be extremely selective, focussing solely on the lowest-cost producers, and even then be prepared for a rough ride.

The latest example of nickel damaging a company exposed to the metal was a fresh asset-value write-down by Australia’s biggest producer, BHP Billiton.

In last week’s annual results, BHP Billiton revealed an impairment charge of $US1.7 billion against its Nickel West operation, a business unit that was once the nickel division of Western Mining Corporation and includes operations at Kambalda and Mt Keith in WA.

The Nickel West business, which incurred a loss last financial year of $US100 million, is now valued at just $US127 million.

BHP Billiton’s management warned in the financial results that both the aluminium and nickel divisions would suffer in the current year from persistent over-capacity. Copper is not expected to suffer from the same over-supply problem.

Investment banks that follow the industrial metals sector are universally gloomy on nickel. Macquarie warned in July that nickel was being held down by a large surplus. “Nickel remains the worst performer,” the bank said.

“A large surplus between supply and demand has opened up and prices have collapsed.”

Deutsche Bank agrees. In a report released last week, it described the 10% price recovery as a “temporary respite”.

Recovery in demand for stainless steel, the dominant end market for nickel, could spark a price recovery later this year and into 2014, according to Deutsche Bank. But in the long term the nickel-mining industry needs to cut production.

Nickel hurdles

That leads to the first of the big hurdles confronting the nickel business: will anyone “blink”, cut production and help lift the price when the major beneficiaries of the sacrifice will be rival producers.

The second hurdle is that the devil’s metal has become surprisingly easy to produce, thanks to technology changes.

One new source of supply is called pig-iron nickel (PNI), which is essentially low-grade (1% nickel) ore shipped unprocessed from shallow open cut mines in Indonesia and the Philippines to China where is it tipped (with the 99% waste material) directly into a blast furnace to produce a nickel-rich pig iron and a vast amount of rubbish.

Another potential future source of supply is a new technology being developed by an Australian company, Direct Nickel, with the CSIRO, which uses nitric acid rather than sulphuric acid to extract the nickel metal.

First trials of the Direct Nickel process have been successfully undertaken at a CSIRO facility in Perth, and the first big user is likely to be an Indonesian nickel producer.

Investing in nickel

The supply surplus, which could last for years, and the associated low nickel price make it difficult to recommend any ASX nickel stock as a buy.

Low-cost producers, such as Western Areas (WSA) and Mincor (MCR), are surviving the low-price environment but they have little hope of generating substantial profits.

Exploration success stories such as Sirius, which could become one of the world’s lowest-cost sources of nickel thanks to the quality of its recently discovered Nova orebody in WA, will also have to overcome the high cost of developing a new mine in a remote location, and then overcome the challenge of selling into a depressed nickel market.

It might be going too far to say sell a sector, but with nickel that can be said until there are signs of producer discipline, falling stockpiles and a sustainable price rise.