Metal Mining

Better earnings prospect from possible price bottoming

• We believe the supply surplus may be buffered by demand from batteries and SS; our FY24-25F Ni price assumptions at US$18k/17.5k/t
• We see NPI demand remaining robust as global SS demand is expected to grow by 5%, implying 9.5% higher nickel demand in FY24F.
• We resume coverage with an OW rating as we expect market balances to stabilize; our pecking order: NCKL> MDKA> MBMA> ANTM> INCO

LME Nickel: supply risk prevails, but steady demand may buffer downside

The recent LME nickel price rally was attributable to the banning of Russian metal listings on the LME, which was followed by the riots in New Caledonia. Nonetheless, supply risk prevails as additional class-1 products from intermediary conversions and capacity growth in China and Indonesia is expected to keep class-1 products in a surplus for a longer period. However, as demand from the battery sector is set to grow from 17% in 2024 to 20% in 2026, we believe prices would only decline as much as the majority of the producer’s cost. Thus, we reinstate our LME nickel price assumption at US$18,000/17,500 per tonne in FY24-25.

Better prospects for class-2 products

Along with the decline in the NPI price to its bottom at US$11,000/ton, Indonesia’s 1Q24 output slightly dipped to 353kt (-1.5% qoq). However, we believe there is sustained demand from China as global nickel demand is expected to grow by +5%, implying +9.5% growth in nickel demand in FY24F, based on WoodMac’s estimate. Along with robust output growth to 2.2Mt, we see more balanced supply-demand dynamics for NPI, significantly lower than the oversupply of 200kt in 2023.

Expect earnings to improve in 2Q24, particularly for INCO

1Q24 earnings misses were largely caused by delayed RKAB issuances that caused sales to lag (i.e., NCKL/MBMA/ANTM’s ore) combined with slumping nickel prices at an average of US$16,600/ton (vs. consensus FY24 est. of US$17,600/ton). However, as 2Q24 LME price improved to US$18,650/ton, we expect 2Q earnings to improve as some sales are carried over from 1Q24. We expect INCO to post the strongest earnings growth followed by ANTM.

Resume coverage with an OW rating; pecking order: ore > NPI > LME

We resume our sector coverage with an OW rating as we see a positive demand trajectory for NPI from strong stainless-steel consumption to drive better market balances. Amid the strong profitability of ore margins and the lingering RKAB issuances delay, we prefer companies that have an exposure to ore sales in their revenue mix (i.e., NCKL: 15%/ANTM: 14%). Our next preference is on the low-cost NPI producers over Class-1 (LME pegged) producers as we prefer producers with earnings visibility and as LME-pegged producers are exposed to a higher downside risk of the oversupply of class-1 products. Thus, our pecking order is: NCKL> MDKA> MBMA> ANTM> INCO.

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