Nickel market crash: Why BHP is falling out of love with nickel
The mining giant is fast falling out of love with the metal and may rethink its longer-term commitment to the critical mineral used in EV batteries.
Are BHP and nickel destined to be melded in a long-term partnership? The increasing caution from the miner around the cost of producing the base metal – the answer is probably not.
Indonesia is now a global force in nickel. It has inherent advantages of having large, rich deposits sitting close to the surface, thanks to the Ring of Fire that the archipelago sits on. Even with the environmental concerns that come with mining and processing the metal that is a key ingredient in batteries, Indonesia is here to stay as a low-cost producer.
Nickel prices have been stuck in a bear market with prices off 50 per cent since the start of last year, and recent wobbles in the global electric vehicle market has kept the outlook gloomy.
And while BHP has deliberately sat out of lithium warning the lack of scale means the economics don’t stack up, nickel too looks to be the next critical mineral to be benched by the miner.
The rise of Indonesia, now the world’s biggest nickel producer, has triggered a longer term shift in the outlook of pricing. And as a relative small nickel producer, this limits BHP chief’s Mike Henry’s ability to respond to lower-for-longer pricing using a cost lever.
Earlier Thursday, BHP hinted writedowns were looming on its Nickel West business, centred on its Mt Keith mine and Kalgoorlie smelter. The Kwinana refinery south of Perth also produces nickel sulphate used in lithium-ion batteries.
“The nickel industry is undergoing a number of structural changes and is at a cyclical low in realised pricing. Nickel West is not immune to these challenges,” the miner said in its second quarter production report. BHP was “evaluating options” at the business that employs more than 2500, to offset the impact of the sharp fall in nickel prices. However, it wasn’t specific. Expect more on February 20 when the miner delivers its first half results.
Already this week Canada’s First Quantum Minerals shut down mining operations at its Ravensthorpe nickel mine also in WA. That comes on the heels of fledgling producer Panoramic Resources collapsing in December.
BHP ultimately decided to stick with nickel when it spun out its grab bag of minerals and smaller-scale operations in the form of South32 mid-last decade.
Since then, it has made a genuine effort to get to know the metal better and its longer term relationship prospects. Even chairman Ken Mackenzie last year told shareholders the ambition is to continue to grow nickel, noting BHP product offered a cleaner, greener alternative.
However, BHP’s Henry is now looking out at a commodity that faces the commercial reality of a flatter cost curve for longer in a mining business that comes all the characteristics of lithium. Even if today’s wobbly EV market picks up in a few years, the longer term outlook doesn’t change.
Without the massive scale of iron ore or copper and even potash when it comes to market, Henry won’t want to be stranded as a high-cost nickel producer in a market that is coming in too low.
The BHP boss has proven to be a ruthless allocator of capital, and already the motivation for last year’s $9.6bn acquisition of copper major Oz Minerals is falling into place. An exploration update in BHP’s second quarter numbers revealed rich copper grades underneath BHP’s vast Olympic Dam copper orebody in South Australia. The depths there are between 1km and 2 km underground, and this means block cave mining – an Oz speciality – would be needed to get the metal to the surface. Already, additional volumes from Oz’s Prominent Hill mine has boosted BHP’s quarterly copper production, and the miner is eyeing a record year. With pricing holding up and production costs low, the capital flows will certainly go to copper in coming years. But for nickel, the future is no so bright.
johnstone@theaustralian.com.au
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