Nickel
Expect NPI price to decouple and stabilize, with volume growth to be key drivers in FY24F
- While we expect LME nickel price to decline further in FY24F, we project NPI price will decouple and stabilize at US$14k/t.
- Given view of stabilizing NPI prices and falling cost, we expect earnings outperformance for producers with volume growth.
- We maintain sector OW and prefer nickel names with high volume growth improvements such as NCKL and MBMA.
LME price under pressure from new influx from Chinese players
The decline in nickel prices in FY23 has materialized despite LME-deliverable inventories continuing to trend at multi-year lows. While the major producers Brazil's Vale and Nornickel are having maintenance works, supply has been boosted by major Chinese groups' plans to produce Class-1 nickel from the emerging nickel sulphate surplus.
Seeing some support on NPI price in FY24F from higher use vs scrap
Amid low stainless steel prices, it is not surprising that scrap use has increased to 23.4% in 3Q23, resulting in the average for the year at 21.4%. However, given the built up of NPI excess, we expect the scrap ratio to fall to around 18% in FY24 and FY 25.
Expect LME and Class II nickel prices to decouple in FY24F
We believe that the improving supply of Class I nickel (which exceeds demand), with China’s nickel output has begun to flow to LME nickel warehouses (pioneered by Huayou in Jul23), will drive decline in LME nickel price to US$17k/t and US$16k/t FY24-FY25F respectively. However, we believe NPI price will decouple from LME prices, and thus, we think a fixed discount for NPI is no longer warranted. In Oct-Nov23, the LME nickel price fell around 14% while NPI price only fell 5.8% vs 3Q23 average. We think this is mainly because the current NPI price is already near the break-even level of more than 30% of NPI smelters globally. We maintain our expectation that NPI price will stabilize at USS14k/t in FY24-25F as we assume supply cuts to materialize if NPI price goes below USS13k/t, which would subsequently support prices.
Prefer NCKL and MBMA due to strong volume growth in FY24F
We had previously assumed NPI prices of US$14K/t in our forecast and DCF-based valuation for nickel players stocks under our coverage. In view of stabilizing NPI prices, we see that the sector’s performance in FY24F for class II nickel producers will be driven by falling cost and delivery of volume, and thus prefer producers with volume growth improvements, namely NCKL (Buy, TP Rp1,400) and MBMA (Buy, TP Rp960). While ANTM stands to benefit from the tight supply of nickel ore, we note that the performance of its FeNi will overshadow revenue growth from its ore business. We believe current share prices have discounted conservative nickel prices/ margin assumptions.
… Read More 20231206 Nickel
