nickel sector and nickel pig iron

Dear All,

Macquarie Securities hosted their annual Global Nickel conference this week. Key presenters included: CVRD-Inco, Norilsk, Jubilee Mines, Minara Resources, ELG Recycling Processes, Brook Hunt and Zhejiang Huaguang (China’s largest nickel-in-pig iron producer). The producers presented on their outlook for the nickel market, and in the following article, Macquarie Research Equities (MRE) summarise this view.

A bullish tone. Not surprisingly, delegates at the conference commented that the current level of pricing (ie ~US$21/lb) had exceeded even the most optimistic forecasts. That said, the underlying fundamentals (and not fund activity) were identified as the clear drivers of the remarkable price rise.

To that end, record low inventory levels, ongoing constraint on the supply-side and rapid growth in Chinese demand have sustainably altered the market outlook. Coupled with elevated capital intensity for development projects, that landscape was widely purported to be supportive of higher long-term prices with Brook Hunt suggesting a range of between US$5–6/lb as more reasonable (Macquarie US$5.50/lb).

In the shorter-term, while MRE do expect the market to move back towards a balanced position, given potential for weakness in the stainless steel market in the second quarter, they do not see any meaningful build of inventories over the course of this decade, which should ensure that prices are well supported above that long-term forecast for an extended period.

Chinese nickel pig iron, friend or foe? The rapid acceleration of nickel pig iron production in China, to potentially as much as 80kt in 2007, was clearly recognised as the key wild-card for the industry to monitor (and given the evolution of domestic alumina production that level of attention is certainly understandable).

However, it was equally interesting to note that industry participants did not view this new source of supply as a threat but rather as a white-knight that would help avert demand destruction. Quite simply, market demand continues to be constrained by the lack of availability of nickel units, which in turn has incentivised high cost nickel production. That high cost, marginal production is similarly expected to support pricing at an elevated level.

Given MRE’s bullish medium- and longer-term view of the nickel market, MRE highlight Jubilee Mines as their preferred pure play exposure in the Australian market. In addition, MRE are becoming increasingly positive on Sally Malay Mining and Independence Group.

".......AGAIN........ MACCA IS STILL S... For Brains !!!!!"

At the larger end, MRE remain attracted to the diversity, robust growth and undemanding forward multiples of BHP Billiton and CVRD.