Tim Treadgold: Nickel on the move – ‘buy the sector’
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Indonesian politics, Chinese steel demand and the speed at which the world is embracing electric cars are morphing into a single powerful force which will lead to the re-pricing of an entire sector of the Australian mining industry; nickel.
Potentially, the combination of factors which are working to either limit supply or boost demand, could see the share prices of pure-play nickel miners soar over the next 12 to 24 months, leading to a rare situation which might be called “buy the sector”.
A glimpse of what could lie ahead can be found in an eye-catching calculation of the earnings power being unleashed in nickel miners from what’s already happened in the market, let alone what might be to come if the price of the metal keeps rising.
According to Macquarie Bank, the rise in the nickel price over the past six weeks could lift the forecast profit of Western Areas (ASX:WSE) in the current financial year by 300 per cent, with Panoramic Resources (ASX:PAN) enjoying a 200 per cent uplift and Independence Group (ASX:IGO) a 100 per cent increase.
A key to those profit increases is the nickel price and previous profit-forecast starting points which, in the Macquarie calculations, is far below the latest price of the metal, which has been rising strongly thanks to the three factors mentioned earlier:
• The early introduction of an Indonesian ban on the export of unprocessed nickel ore;
• Strong demand in China for stainless steel, the primary market for nickel; and
• Rising demand for electric cars which require large amounts of nickel in their batteries.
Those developing forces in the nickel market have caught Macquarie, and other investment banks, on the hop with their price forecasts from just a few weeks ago well below the current nickel price.
“We note that spot (short-term) nickel is now $10.90 a pound, and is 40 per cent and 20 per cent higher than our 2020 financial year and 2021 financial year forecasts, respectively,” Macquarie said in a new report on the nickel sector titled: “Share prices lagging the nickel price”.
The bank’s use of an Australian dollar price for nickel, which is what the local miners get on conversion of the internationally-traded US dollar price, tells another positive part of the nickel story for local investors – the double-whammy being enjoyed by miners.
First, they get the higher price for the nickel courtesy of international demand which is being influenced by declining stockpiles, which has seen the London Metal Exchange price for the metal rise by 30 per cent since early July from $US5.50 ($8.12) a pound to $US7.25/lb.
Then they get the currency boost caused by the Australian dollar slipping from US70c to US67c over the past six weeks, a decline which lifts the latest local nickel price to $10.80/lb – slightly down on the $10.90/lb used by Macquarie which made its calculations using last Friday’s prices.
Minor adjustments to the price do not diminish the story of a sector moving into a fertile period of rising demand, potentially falling supply, diminished stockpiles and the development of a major new market.
What triggered Macquarie’s latest look at nickel are reports of the Indonesian government potentially bringing forward its export ban which had been slated for 2022 but which the country’s mines minister wants to introduce immediately while leaving the final decision to Indonesian President Joko Widodo.
At its current rate of production, Indonesia accounts for 10 per cent of the world’s nickel, and in a tight market which has seen stockpiles decline for the past four years, losing another 10 per cent would be a significant price driver.
“The implications of an early ore (export) ban are significant,” Macquarie said. “While some supply response from the Philippines is possible should the ban be reinstated, the net effect could more than double the current supply deficit.
“Nickel equities are lagging the recent move in the nickel price with Independence, Western Areas and Panoramic are up 12 per cent, 19 per cent and 23 per cent. Over the same period the Australian dollar nickel price has risen by 40 per cent.”
Macquarie sees Independence rising to $5.90, an 11 per cent increase on its latest price of $5.32. Western Areas is expected to reach $2.80, a 13 per cent advance on its latest price of $2.48, and Panoramic is expected to reach 46c, a 35 per cent rise on its latest price of 34c.
While those share price tips from Macquarie are not far above where the nickel miners are currently trading, the bank’s case for buying the three stocks is based largely on the Indonesian situation, one of three nickel-price forces at work.
Chinese demand for stainless steel, as it encouraged domestic construction to ward off the worst effects of the trade war it is waging against the US, is just as important as the Indonesian export ban, while the electric car revolution is highly likely to be a major long-term nickel-demand event.
How high nickel might go over the next few years is unknown, but what is known is that (a) nickel is a mercurial metal with extreme highs and lows, and (b) the supply/demand equation has rarely looked more favourable.