Analysis: BHP faces nickel choice this year as high-cost Australian miners suffer

Panoramic Resources

17/01/2024 01:25

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      Australian miners hurt by Indonesian supply, weaker demand
    

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      Nickel prices wallow near three-year lows
    

        * 
      First Quantum restructures Australian nickel operations
    

        * 
      BHP could delay West Mulgrave project - analyst
    

  
    By Melanie Burton
       MELBOURNE, Jan 17 (Reuters) - Australian nickel
producers, hit by a sharp jump in supply from rival Indonesia,
are starting to buckle under low prices that analysts expect
will force a rethink by top global miner BHP Group  BHP.AX  on
its nickel strategy this year.
    The metal has long been feted as a key battery material for
electric vehicles because it improves energy density so cars can
run further on a single charge. 
    BHP has promoted nickel as core to its green strategy. It
signed a deal to supply Australian nickel to Tesla  TSLA.O  in
2021, touting the country's rich geology and strong financial
and environmental regulations. 
    But Australia's producers have been squeezed by Indonesia's
emergence as a supply powerhouse and on the demand side by
innovations away from using nickel in batteries, which have led
to a 40% price slump over the past year to around $16,000 a ton.
    "The challenges facing many nickel producers are unlikely to
ease near term. We are bearish on the commodity and quite
cautious on assets and producers," said UBS analyst Lachlan
Shaw.
    Lithium iron phosphate (LFP), which does not use nickel, has
been gaining ground as the EV battery chemistry of choice,
especially in China, because LFP batteries can be produced more
cheaply, making EVs more affordable.
    However, BHP has placed a big bet that nickel sulphide
deposits in low-risk jurisdictions will attract a premium
because they use less energy to extract nickel than laterite
deposits found in Indonesia.  
    It is not alone. 
    Wyloo Metals, which last year bought nickel miner Mincor for
$504 million, still believes in the long-term fundamentals for
Australian nickel, said CEO Luca Giacovazzi.
        "The industry needs a more appropriate and transparent
pricing mechanism, that distinguishes between clean and dirty
nickel, so consumers can be confident their EV really is a
better choice for the environment," Wyloo's Giacovazzi told
Reuters.
        But for now, weak prices have forced Australia's high
cost producers to announce a swathe of writedowns and
restructures, with Canada's First Quantum  FM.TO  the latest to
cut production.
        
  
    SHELVING PROJECTS?
    Earnings tanked at BHP's nickel business in the 2023
financial year, sliding 61% from a year earlier to just $164
million. The division accounts for less than 1% of its earnings.
    "We are working hard to remain globally competitive in a
very tough operating environment. Costs have risen sharply and
continue to go up while prices have fallen as new supply comes
into the market," said BHP Nickel West Asset President Jessica
Farrell.
        She said the company is working to "take action to
address these challenges", without elaborating.
    At its Western Australian nickel operations, BHP is
assessing options for a major smelter renewal and a mine
expansion while it sets out to build the West Musgrave mine that
it acquired with its $6.4 billion takeover of Oz Minerals.
    One option for BHP could be for it to delay West Musgrave 
until the market recovers, said Barrenjoey analyst Glyn Lawcock.
    "Clearly right now nickel is challenged," he said. "(But) I
think to write nickel off today for forever is a big call." 
    Even with the growing use of LFP batteries, they won't
capture 100% of the market. As consumers go for cheaper cars,
governments could mandate greener sourcing policies, he noted.  
   
    "It's going to be a big decision point for BHP this year,"
Lawcock said. 
     

 (Reporting by Melanie Burton; Editing by Sonali Paul)
 ((melanie.burton@thomsonreuters.com Twitter: @MelanieMetals;
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melanie.burton.thomsonreuters.com@reuters.net))