Nickel – a welcome distraction

ROADHOUSE COMMENT: Are there any other commodities to talk about other than iron ore?

As it turns out there are, and one likely to be turning a few heads in the not too distant future is nickel.

At this year’s PDAC Convention in Toronto, Royal Nickel Corporation president & CEO Mark Selby presented his insights into the current state of the nickel market and where it most likely could be heading.

According to Selby nickel is now entering a multi-year period of structural nickel supply shortages.

These, he said, are to be caused by nickel demand continuing to be robust, following the recent trend which has seen growth averaging 6.3 per cent since 2010.

In 2014 alone nickel demand grew by more than five per cent and strong demand for the commodity is expected to continue in 2015.

Selby indicated that although there was a large increase in LME stocks this was offset by massive destocking in China adding that existing sources of nickel supply will struggle to provide required overall supply, which is likely to decline in 2015-2016 with net supply growth of just over two per cent by 2020.

He explained that the ‘Big 15’ nickel operations, which accounted for more than 60 per cent of supply in 2005, have actually shrank by three per cent and are likely to continue to decline going forward with little expansion potential.

 

Big discoveries of nickel having been wanting over the past few decades, in the 1990s we had the Voisey’s Bay and Enterprise discoveries, which were followed up by a productive time in the 2000s with the Eagle, Nickel Rim South, Musgrave, Araguia, and Sakatti discoveries.

However the 2010s are light on in the discovery category, with only the Nova Bollinger discovery by Sirius Resources (ASX: SIR) doing any serious cage rattling.

“The nickel project cupboard is largely empty and the pace of discoveries is at a fraction of what’s required,” Selby said.

“What we now need is the discovery of around two Voisey’s Bay and three to four Nova-Bollinger deposits each year.”

Selby identified Indonesia, and the country’s ban on commodity exports, as a critical factor in the upcoming fortunes of the nickel market.

“With the ore ban resolutely in place, Indonesia is positioned to become the world’s largest nickel producer and one of the largest stainless steel producers,” he said.

The question Selby raised was how quickly can 350,000 tonnes of nickel projects be built to replace current nickel pig iron (NPI) production from Indonesian ore in China?

China, he explained, took six years to create 450,000 tonnes per annum of nickel production.

Could Indonesia, he hypothesised be able to replicate that capacity given that country’s lack of infrastructure, skilled labour, and power?

Will it happen by early 2020s? Mid 2020s? Late 2020s?

Selby also pondered on the willingness of financial institutions to provide the billions of financing required to replace 350,000 tonnes of Chinese NPI production from Indonesian ore, given financing requirements would be US$17 to US$28 billion (at recent global examples of US$50,000 to US$85,000 per tonne).

With the number of nickel projects needed to come on line, would these institutions, he wondered, require projects to be successfully commissioned before financing the next ones?

Whatever the answers to these questions may be, Selby suggested we have a long way to go to find out in the current nickel cycle, which he indicated we have only hit the 15 month mark of, highlighting these cycles typically take 16 to 29 months to unfold.

Past cycles, he said, indicate that nickel prices could get to US$30,000 to US$50,000 per tonne by early 2016 and structural supply shortages to maintain prices at above average price levels through end of decade.

Whatever unfolds, it would be wise to strap yourself in tight. It could be a wild ride.