DESPITE nickel prices shedding about US$10,000 per tonne since March this year, many nickel experts are bullish on the metal’s longer term outlook, with one analyst saying the current price volatility had nothing to do with underlying demand and that once investors’ jitters settled, nickel’s price would spring back and grow about 5 per cent annually.
It’s no secret international financial and commodity markets are taking a beating at the moment and the International Monetary Fund (IMF) has downgraded growth forecasts for many developed nations including Australia, which has had its forecast cut from 3 to 1.8 per cent for 2011. The IMF cited a new global recession and a drop in commodity prices as the main reasons for the slump in Australia’s growth forecast.
Alto Capital senior analyst Carey Smith said that demand for nickel remained stable in the short term, and that the drop in nickel and other base metal prices was a result of investors withdrawing their cash from these commodities and stashing it with what were traditionally safe haven investments, such as gold plus US dollars and treasuries. “Price fluctuations, on the other hand, will probably be dramatic, because it has nothing to do with the real world,” Mr Smith said. “It is more to do with speculators and investors taking their money out of risk assets, which includes commodities, currencies and real estate etcetera, and putting it into what they consider safe assets, which at the moment consists of US dollars and US treasuries.” Mr Smith said that while this mass reshuffling of investor cash was causing short-term volatility in nickel and other base metal prices, he believed nickel’s price would sit between US$18,000 and $22,000 per tonne during the next five years. “But in the short term there could be large
fluctuations. It could drop below US$15,000 a tonne or it could increase to above US$25,000. At the time of writing, the nickel price on the London Metals Exchange was about US$18,100/t. Despite concerns there will be a repeat of the Global Financial Crisis that caused the nickel price to plummet to its lowest at US$8810/t and resulted in the closure of many nickel mines around the world, Mr Smith said he doubted that, if the price did plunge, it would remain at the lows seen during the GFC, where it hovered under US$10,000/t between October 2008 and March 2009. “For a short period of a couple of weeks or a month, it could happen. It is dependent on the world with the financial crisis in Europe.” However, Mr Smith said he believed a nickel price less than US$10,000/t wasn’t sustainable.
“The most important point is that the movement of the nickel price over the next six months is probably going to have nothing to do with the actual nickel or commodities market: it is going to be a result of cash flows.” Mr Smith’s opinion on the volatility of nickel comes as no surprise to nickel-focussed companies, which are aware of the metal’s unpredictability and are prepared to ride out seesawing prices until the market settles. Multi-commodity explorer Metallica Minerals’ chief executive Gavin Becker said he was a great believer in the cyclical nature of the market.
“The outlook in Asia, particularly China and India, is so strong that we are going to see significant ongoing requirement for base metals – especially nickel for stainless steel. I absolutely expect strength to be maintained due to supply battling to keep up with demandin the longer term. “The urbanisation in China is driving the demand tremendously, notwithstanding the situation is a bit depressing in Europe and America at the moment, but the outlook is exceptionally good and there willbe a tremendous need for additional base metals and other consumables to support the urbanisation that is going to continue in China for the next 20 or 30 years.
“We are very optimistic about the longer-term future of nickel. We don’t look at the price on a day-to-day basis: we look at it on a long-term basis, and I believe there is a lot of opportunity and a requirement for a number of new projects out of Australia and elsewhere around the world to supply that increasing demand for base metals,” Mr Becker said. Echoing Mr Smith, Mr Becker said his opinion was that the nickel price would sit around US$20,000/t for a number of years. Musgrave Minerals managing director Robert Waugh shares the view that the growth and subsequent infrastructure requirements of China and India would maintain the demand for nickel and base metals.
“There will be strong demand and that will keep prices up.” Mr Waugh agreed that nickel explorers and miners were aware of the commodity’s volatility and were prepared to endure the price fluctuations.
“You reduce your cash costs so you can get through the hard times. “You do try and take grade into account. If commodity prices are low, you can try and lift the grade so you are leaving some of the lower-grade stuff behind. Then, when prices increase, you suddenly lower your cut-off grade so you can remove and mine more of the lower-grade material. So in the total output you get more metal, but at a lower grade.”
In addition to adjusting grade and reducing cash costs, many maiden nickel miners enter into off-take agreements. “Off-take agreements do help offset the volatility, but also reduce your exposure to the
upside when the commodity price increases. “Generally, commodity prices come off in recessions. This one has been a little bit different in that the global financial situation has meant that governments have actually tried to put stimulus packages in place to increase infrastructure development, which historically has not happened, so there’s a little bit of that separation in this current situation to what has happened previously.” Mr Waugh said that due to these stimulus packages, he had a more positive outlook the nickel price in the current climate as compared to previous recessions.
By Lorna Seatter