For once we have a metal for which China does not dominate the supply market. Nickel is mined and refined largely in Australia, Russia and North/South America. China’s role in the sorry tale is as consumer. As the price rocketed in 2006/7 designers and engineers found ways to work with low nickel stainless steels, duplex and even titanium to offset price increases. Demand destruction at it’s classic best followed to the point where even major long term mineral players like BHP are now apparently exiting the business. In truth though the price has done no more than return to its long term trend, see chart below:
In the meantime however mining companies have paid astronomic prices for assets only to see the value shredded along with the metal price. Norilsk, the leader by volume, posted a loss last year of $555m, after a profit of $5.3bn for 2007. And they are not alone. BHP, Vale, Xstrata, all the nickel majors have seen profits turn to losses as mining costs have remained stubbornly high but volumes and sales prices have fallen. And that is part of the problem. As prices increased, mines were expanded or new ventures were started such that capacity rose too. As volumes declined dramatically since 2007, mines were left operating at well below capacity and costs per ton rose. This graph of stocks illustrates the relentless rise in inventories as production capacity failed to be cut fast enough. Nickel producers just could not believe the stainless market, home of 2/3rds of all nickel produced according to Mineweb, would not come back.
Now even BHP is throwing in the towel. According to Bloomberg, they may have sold Yabalu for as little as $100m writing down the carrying value of $500mm and unrealizable tax benefits of $175m. Yabalu produces 35,000 tons of nickel and 2,500 tons of cobalt but has the capacity to produce twice as much nickel and a further 700 tons of cobalt according to quotes in the article. BHP is the world’s third largest nickel producer with operations in western Australia and Colombia. Western Australia alone produces 100,000 tons of nickel but many see this as the beginning of the end of BHP’s play in the nickel sector.
Are they getting out at the bottom? BHP’s acquisitions strategy has not been quite as disastrous as Rio, Xstrata and some others but possibly that was more luck than judgment. They dropped bidding top dollar for Rio only because the markets collapsed last year. Only time will tell if the decision to move out of nickel is a good one or not. It will take further mine and processing closures to bring the market back into balance and as the graph above shows there is a lot of stock around that will depress prices for some time to come.