Nickel Bull challenges Market Matadors

THE CONFERENCE CALLER: Addressing the Paydirt 2016 Australian Nickel Conference in Perth, Alto Capital senior analyst Carey Smith gave the audience plenty to think about.

A long-time believer in nickel, Smith declared his thoughts on nickel’s prospects by forecasting a nickel price outlook from a low of US$17,400 per tonne to a mid-range of US$23,100 per tonne, peaking at a top out price of US$30,800 per tonne.

The root of his prediction is Chinese stainless steel production, which Smith said holds the key to higher nickel orders for Australian miners pointing to key growth indicators emerging of late despite the flat lining of both global and Chinese output in recent years.

Smith intimated that nickel’s time was due, saying that most base metals were enjoying an up-trend, with lead, tin and zinc trading above their 10 year averages.

“Nickel is looking better, but still remains the only base metal to have fallen below GFC lows,” Smith said.

“Its price bottom comes at a time there is uncertainty around a possible relaxation by Indonesia of its current ban on laterite nickel exports, countered by nickel mine closures in the Philippines due to alleged environmental violations – and to such an extent that country’s nickel output is down to 55 per cent of 2015 levels.

“In China, production of Nickel Pig Iron (NPI) is estimated to have fallen to approximately 300,000 tonnes nickel equivalent for 2016 compared to more than 500,000 tonnes nickel equivalent in 2013.
 
“Its NPI output had increased six-fold between 2006 and 2013 (25,000t to +500,000t) but has decreased on Alto’s estimates to around 300,000 tonnes for 2016 with a reliance since 2014 almost exclusively on sourcing laterite ore from the Philippines – the supplier now closing nickel mines – and from stockpiles.

“This contributed to a picture of nickel laterite imports into China more than halving since the end of 2013 at a time China is outperforming when it comes to production of stainless steel – of which nickel is a key ingredient.”

According to Smith, global output of stainless steel, excluding China, has been flat for the past five years, and appeared to have stabilised at around a total of 20 million tonnes per annum.

He declared there to be no visible catalysts to suggest this production profile will increase significantly from current levels anytime soon.

“Yet in the same period, despite two recent flat years, Chinese stainless steel production has grown strongly over the past decade to a point China now produces over half of the world’s consumption of that commodity,” he said.

“This has contributed to total combined world outputs of between 41 to 42 million tonnes per annum though that figure has currently flat-lined.

“It raises the question of where will future stainless steel demand and therefore nickel demand, growth come from.”

The Alto Capital analyst pointed to China’s very strong June quarter this year for stainless steel production and it was likely it was the beginning of a new trend rather than a one-off figure, at a time global nickel consumption had averaged at least 3.2 per cent in the 56 years since 1960.

“The upside comes when you consider Chinese imports of unwrought nickel have climbed dramatically since mid-2015, up from around 150,000 tonnes per annum to 400,000 tonnes per annum currently,” Smith said.

“This trend should be viewed as a positive growth indicator for nickel.

“In addition, London Metals Exchange (LME) nickel stocks had peaked at more than 450,000 tonnes but have eased currently to slightly more than 350,000 tonnes or down more than 100,000 tonnes – also another positive indicator re potential future demand.”

As far as Australian nickel producers go, Smith said, the South East Asian politics surrounding nickel laterite exports would be the issue to watch over the next 12 months but the AUD/USD exchange rate would continue to be an added bonus.

“The bottom line is, we will look back on this time in a couple of years and say ‘that was a massive opportunity’ as it is not easy to recognise the bottom when you are in the middle of it,” he said.