Picking through the wreckage of commodities markets at the end of 2018, few investors will see much hope in the debris. Recent disappointments tend to stick in the craw, after all. So even if there are some budding signs of an apparent détente between the US and China, it’s only natural that the enduring threat of a trade war between the world’s two largest economies should trump fading memories of surging demand (and metals prices) in the run-up to the northern summer.
The metallic poster-child for this slump has been copper, which is often viewed as a key barometer of global economic growth. Absent a last-minute price swing, the red metal is on course to close the year 15 per cent off its June high of $3.29 (£2.58) per pound. On its economic fundamentals, it’s a confusing situation, not least because medium-term mine supply is set to tail off, demand is expected to remain solid and London Metal Exchange stockpiles have crumbled to a five-year low.
But copper isn’t the most baffling base metal market, by a long shot. That title goes to nickel, the price of which has declined 30 per cent over the same period, despite five years of strong compound annual demand growth, a similar collapse in stockpiles (see chart) and an arguably even brighter future ahead of it than copper. After falling below $11,000 a tonne, Macquarie Wealth Management recently described nickel prices as "unsustainably low", and in “'bargain' territory based on a misreading of the strong fundamentals likely for a number of years yet". The question for investors (as it always is): when will that bright future start to be reflected in prices and miners’ earnings?
Masked fortunes
The next few months don’t offer a wealth of hope, even if the market may already be in a deficit. A weak stainless steel market in China remains a big challenge, as year-on-year falls in output have dissuaded steel mills from purchasing the metal – even at knock-down prices. A strong dollar, and fears about European and global economic growth have also bolstered bearish trading positions, further compounding weak prices. The wide spread in analyst forecasts (see table below) only underlines the uncertainty.
| Analyst forecasts ($/t) | Q4 18 | Q1 19 | Q2 19 | Q3 19 | Q4 19 | Q1 20 |
| Median | 13350 | 13500 | 13653 | 13364 | 12689 | 12250 |
| Mean | 13416 | 13576 | 13739 | 13268 | 12834 | 12281 |
| High | 16500 | 17500 | 18500 | 15500 | 15000 | 13839 |
| Low | 11949 | 11622 | 11506 | 11355 | 11129 | 10754 |
| Forward | 11293 | 11064 | 11145 | 11223 | 11295 | 11361 |
| Difference between median and spot | 2057 | 2436 | 2508 | 2141 | 1394 | 889 |
| Source: Bloomberg |
But in the longer term, this reliance on the stainless steel industry promises to come unstuck. That promise centres on the metal’s growing use in batteries, including the rechargeable nickel-cadmium batteries and nickel-metal hydride batteries used in electric vehicles (EVs), where demand is expected to surge in the coming years. It’s a story that will be familiar to many resources investors. Glencore (GLEN), which now pitches itself as investors’ best play on the looming electric vehicle boom, expects the looming demand to be massive.
It’s not hard to see why. Based on CRU Group projections for a compound annual growth rate in electric car manufacture above 30 per cent between now and 2030 (when sales will hit 30m a year), the commodities giant reckons that an additional 1.1m tonnes of nickel will be needed to plug the gap. That’s equivalent to 55 per cent of total global supply in 2017 – based on a 53 kilowatt hour (kWh) average battery pack, of which 30kg will be made of nickel.
This is an outlook Glencore is happy to champion. Last year, the group produced 109 kilotonnes (kt) of the metal, and plans to boost output by 30 per cent by 2020. And unlike its copper and cobalt divisions – the two other undersupplied, in-demand metals in that EV future – Glencore’s nickel assets are in less contentious jurisdictions such as Australia, Norway and Canada.
Much of Glencore’s projected nickel growth centres on Koniambo, the New Caledonian mine it jointly owns with South Pacific Mining Company, which is expected to reach full capacity by 2022. It has also identified room for growth at two more Canadian mines: Raglan in Quebec and Onaping Depth in Ontario, both of which could help to mitigate declines at Norman West and Nickel Rim Depth.
Nickels and mines
Glencore is not alone in these commitments to the metal, as you might expect given the apparent deluge in demand. Global leader Vale is investing $1.7bn in its Voisey’s Bay nickel complex. Russian giant Norlisk Nickel expects new projects to lift its copper and nickel output by as much as 15 per cent by 2025.
BHP Billiton (BLT), the largest London-listed nickel producer via its massive, fully-integrated Nickel West operations in Western Australia, is also doubling down. Last year, anticipating the shift in the sources of demand, the company “began its transition to become a global supplier to the battery materials market”. That pledge included approval of the first phase of a nickel sulphate plant at its Kwinana refinery, which is set to begin production in early 2019 and will ramp up to 100kt of nickel sulphate per year. Other pushes include mining for new ore at its satellite pit at Mt Keith, and another project at its Leinster Nickel operation – investments that don’t immediately point to the long-mooted sale of Nickel West.
Should BHP decide to sell out of nickel, presumably given its limited effect on group earnings, it’s unlikely to be short of buyers. Industry consultancy Roskill expect "major producers to… review their operations, look to consolidate costs, or realign their operations to different markets".
