Is the Nickel price close to a trough? Morgan Stanley has the answer

Nickel prices have fallen nearly 50% since the 3 January 2023 peak, putting severe pressure on companies involved in its exploration and production. This is a stark contrast from the massive bull market it experienced in 2022 following Russia’s invasion of Ukraine, which saw prices surge on fears of major supply disruptions.

In reality, the market was awash with cheap nickel supply from Indonesia in 2023 which now accounts for roughly half of global supply. Indonesia, backed by massive Chinese investment in smelter capacity, has flooded the market with lower quality nickel pig iron (NPI). Australian producers, which produce a higher quality but higher cost product from nickel sulphides, haven’t been able to compete.

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Nickel prices cratered in 2023 due to a flood of cheap, lower quality nickel pig iron from Indonesia

It also hasn’t helped that higher interest rates have crimped global economic growth, and the Chinese economy has slowed more than expected due to its ailing property sector – a major consumer of steel, of which nickel is a key component. Even worse, nickel has suffered from a general downturn in expectations in the electric battery industry, which also helped crash the price of lithium and other battery metals.

The upshot is mine closures for several local producers and developers, including Panoramic Resources’ (ASX: PAN) Savannah mine, Wyloo Metals’ Kambalda operations, and IGO’s (ASX:IGO) Cosmos and Ravensthorpe mines.

Close to a trough? Morgan Stanley weighs in

The situation appears dire for the nickel industry, so a recent research report from major broker Morgan Stanley is extremely timely. It’s titled “Nickel: Close to a Trough?” and it outlines the case for and against the prospect 2024 may deliver a nadir in nickel prices.

Morgan Stanley suggests the above mentioned closures equate to “54kt of mined nickel capacity” and this accounts for approximately 30% of the brokers previously modelled surplus for 2024. The situation is precarious for many producers, however, and there’s as much as 253ktpa (kilotonnes per annum) of potential supply “at risk” of curtailment.

Morgan Stanley notes the nickel price cycle hasn’t been this bad since 2016, when the price fell below US$8,000/t on the London Metals Exchange (“LME”). This price level forced even NPI projects to close, and it may be the case again. The broker suggests cuts from NPI projects in China, which produce around 240kt NPI are already facing “squeezed margins”. Indonesian NPI producers are less likely to come under pressure at current prices, however, and remain a key swing factor in the market.

The other key issue with respect to supply according to Morgan Stanley is building inventories at LME and Shanghai Futures Exchange (SHFE) warehouses. Russia remains a key market player, also, and along with an influx of Chinese supply, the market remains well supplied with finished nickel product.

Looking at the demand-side, the situation appears just as challenging for nickel. Morgan Stanley notes a “subdued” steel industry. Global stainless-steel output fell 6% in 2023 and whilst Morgan Stanley expects 6.8% growth in demand in 2024, it says this estimate is “likely to see downside risk”.

The other tent peg of nickel demand is from EVs and other battery manufacturers. Here, Morgan Stanley notes the growing market share of Lithium iron phosphate (“LFP”) batteries. Whilst only 13% of demand, says the broker, the increase in use of this technology grew 30% in 2023 and it now represents 70% of penetration in China. Western battery producers “are looking to use more” LFP technologies in their batteries, and nickel-free sodium-ion battery tech is also emerging, Morgan Stanley points out.

The nickel price is 15% below the 90th percentile, Source: Wood Mackenzie, Morgan Stanley Research

Despite all the above, Morgan Stanley suggests the possibility nickel is close to a trough “looks increasingly likely, in our view”.  The broker points out that the current spot nickel price is at the 75th percentile of Wood Mackenzie’s (“Woodmac”) cost curve (the Woodmac Cost Curve is a widely used global nickel industry cost curve). Historical market troughs in the nickel market, suggests Morgan Stanley, tend to occur around the 70th percentile of the Woodmac Curve.

“We may be starting to find a floor for nickel pricing”, says the broker who now expects the nickel price could bottom around US$15,500/t in the second quarter of 2024. This is around 4.5% below current spot pricing at the time of writing.

Broker moves: Macquarie cuts nickel developers’ price targets

Macquarie blames the dire situation with the nickel price for recent price target downgrades among nickel developers within its coverage. The broker argues that declines in stock prices within the sector, which are in the order of magnitude of 90% for nickel and platinum group metals developer Chalice Mining (CHN), will inevitably cause lower price realisation in future capital raisings, therefore resulting in greater dilution to raise the capital required.

Chalice Mining (ASX: CHN) – Price Target cut to $2 from $3

• “CHN has been the worst performing stock down 89% in part due to significant reductions in nickel and palladium prices”

• Cuts earnings per share (“EPS”) estimates 6-8% FY24/FY25

• Incorporates additional dilution from assumed equity raise to help fund Gonneville development which now occurs at lower price ($0.85 per share vs $1.55 per share previously)

• Retains “OUTPERFORM” rating

Centaurus Metals (ASX: CTM) – Price Target cut to $0.70 from $1.00

• Incorporates additional dilution from assumed equity raise to help fund Jaguar development which now occurs at lower price ($0.38 per share vs $0.24 per share previously)

• Cuts EPS estimates 4-27% CY23/CY25

• Retains “OUTPERFORM” rating

Lunnon Metals (ASX: LM8) – Price Target cut to $0.7 from $1.10

• Development pushed back 12 months

• Incorporates additional dilution from assumed equity raise to help fund Silver Lake and East Trough development which now occurs at lower price ($0.24 per share vs $0.55 per share previously)

• FY25 EPS “from positive to negative”

• Retains “OUTPERFORM” rating