More pain for nickel, lithium as supply deluge bites

The meltdown in nickel and lithium may have further to run as falling prices and rising costs continue to squeeze mining companies’ profit margins, but investors and strategists are more optimistic about copper on expectations of a supply shortage.

BHP earlier this month wrote down the value of its nickel business by $5.4 billion pre-tax, while billionaire Andrew Forrest’s private company Wyloo is shutting several nickel mines it bought for $760 million just six months earlier. In lithium, Pilbara Minerals reported a 77 per cent collapse in half-year earnings from tumbling prices.

Of the three critical minerals, nickel has the darkest outlook as Australia sheds hundreds of jobs. Last year, the metal price slumped 44 per cent and BHP chief executive Mike Henry said he expected the market to remain in surplus until at least 2030.

Bearish outlook

Sam Berridge, portfolio manager and resources specialist at Perennial Funds Management in Sydney, said he was not convinced that nickel had bottomed because Indonesia, the world’s biggest nickel producer, continued to flood the market with cheap supply.

Another concern for the metal, which is used in batteries for electric vehicles and renewable power generation, is that the fastest-growing chemistry for batteries is lithium ferrous phosphate (LFP) which doesn’t have any nickel.

“We’ve seen battery chemistry evolve rapidly just over the last five years and as we go through the energy transition process, the technology that we’re going to use to decarbonise in 2038 is probably going to be different to 2018,” Mr Berridge said.

Three-month nickel prices on the LME tumbled 44 per cent last year to trade at $US17,495 and Tribeca’s portfolio manager Ben Cleary does not foresee a rebound anytime soon.

“The Indonesian production has become the cost curve and Australian miners are struggling to compete,” he said. “Until there’s a circuit breaker or a change, it’s going to be tough.” Australia is the world’s fifth-largest producer of nickel.

Amplifying worries, Indonesia’s mining ministry, on Monday said it had issued approvals for mining quotas of 145 million tonnes of nickel ore in a move to address delays in the approval process.

For Vivek Dhar, a mining and energy commodities strategist at Commonwealth Bank, China will be a key determinant for the metal’s future.

He said the biggest risk over the next decade was if Indonesia continued to push prices lower. “What Indonesia has managed to achieve in the last five years has exceeded anyone’s expectations,” he said.

Nickel’s future would depend on economic activity in China, which accounts for 40 per cent to 60 per cent of base metal demand, Mr Dhar said.

The fund managers are also bearish on lithium, though they said prices had at least bottomed.

EV shock

That was after lithium prices plunged 85 per cent last year amid an unexpected slowdown in electric vehicle sales, which forced producers to cut costs and defer investment projects.

Last week, Mineral Resources said it might curtail the timing of the first production from its Wodgina train in Western Australia and IGO said the opening of a processing plant at the Greenbushes site was under review.

“We are at the bottom,” said Mr Berridge of lithium. “The big question is how long will prices go sideways and that depends on demand, rather than supply.”

He said there was legitimate pain across the industry and that sellers were “point-blank” refusing to cut prices further because of economics, so the recovery would depend on the outlook of EV sales.

Tribeca expects spodumene lithium prices to “bumble along” between $US800 and $US1200 for the next six to 12 months, from $US910 currently. Just last year it was fetching $US8000.

“I don’t expect prices to bounce back towards where they were,” said Mr Cleary. “But I am comfortable that we could see long-term prices around $US1200 which would still give Australian producers $US600 a tonne on a 50 per cent operating margin.” Australia is the world’s largest explorer of the battery metal.

Commodity pundits are more upbeat about copper.

Daniel Hynes, a senior commodity strategist at ANZ, forecasts copper production to slip 4 per cent this year as miners struggle with high costs and weakening quality.

First Quantum Minerals shut its Cobre Panama site, one of the world’s largest open-pit copper mines, late last year and Anglo American and Codelco cut annual guidance. Anglo American last week said it was reviewing its mining operations after a 94 per cent tumble in annual profit.

Bright outlook

At the same time, demand from China, the US, and India – three of the top five global consumers of copper – is expected to climb by 4.3 per cent this year.

“This is likely to see the copper market returning to deficit this year, which should underpin prices,” said Mr Hynes. He forecasts three-month copper contracts on the LME to reach $US10,000 per tonne in a year, from $US8560 currently. They fell $US8000 last year, but prices have started to rebound.

Mr Cleary is equally positive. saying: “We think copper will remain in deficit for most of the decade as major miners are having problems containing costs.”

The Tribeca fund manager cited “massive” cost blowouts at BHP, Rio Tinto, and South32 on base metal projects. He expected spot prices to bounce.

“You can buy copper producers in Australia and globally that are factoring in long-term prices below where we are. So the value, from a corporate equity perspective, is attractive to us,” he said.

Mr Berridge also said prices were more likely to go higher than lower over the next six months.

“The one thing you need to set the copper price alight is a sprinkling of demand surprises; a stronger US economy or China ramping up demand or higher global demand from the decarbonisation,” he said.

Mr Dhar said prices needed to be higher “to bring on enough copper”. But in the near term, it would be driven by demand from China. Copper is widely used in power, construction and transport sectors.