BHP joins the distressed-nickel party | Hotter Commodities

BHP has lowered its nickel price assumptions and said that it had now valued the unit’s net operating assets at a negative figure of $300 million, when including closure and rehabilitation provisions of about $900 million. It will take a $3.5 billion pre-tax impairment on the unit when it publishes its first-half earnings report next week.

This is yet another fall from grace for one of the nickel industry’s major producers at a time of weak prices and high operating costs, conditions that BHP said were “expected to endure for a considerable time.”

And it comes hot on the heels of nickel-related announcements by Glencore, Wyloo, First Quantum and IGO, among others.

In fact, Wyloo’s actions at Kambalda, also in Western Australia, had already forced the hand of BHP at its Kambalda nickel concentrator, which takes ore from Wyloo to be refined, and which will be put on care and maintenance from June 2024.

Now BHP is reviewing the development plans for its nickel operations with a focus on preserving cash, which includes the potential to put Nickel West – one constituent of the Western Australia Nickel unit – into care and maintenance. The operations produced 80,000 tonnes of nickel in 2023, with more than 85% of this volume sold to global battery material suppliers.

Prior to BHP’s announcement, Fastmarkets analyst Andrew Cole estimated that a total of 658,000 tonnes per year of capacity had been forced to take some sort of action due to low nickel prices.

According to Cole, nearly 300,000 tpy of this capacity relates to delays or postponements of future projects not yet in production, while 187,000 tpy relates to facilities that are currently operational and 69,000 tpy is for non-price-related reasons such as repairs, sanctions, accidents and technical problems.

“Total expected unplanned production losses this year, based on all incidents, amount to 256,000 tonnes,” Cole added.

Indonesia and the LME

When announcing its review, BHP pointed a finger of blame at both the dramatic rise in nickel production in Indonesia and the move by the London Metal Exchange to accept Indonesia-origin nickel products as part of its efforts to respond to evolving industry dynamics.

Certainly, Indonesian nickel production has expanded significantly in recent years. The Southeast Asian nation is on track to account for an estimated 60% of global nickel supply by 2025 and 75% of global nickel supply by 2030.

The country’s recently installed president, Prabowo Subianto, is not expected to roll-back his predecessor’s approach to raw materials, which was that companies must add value to minerals such as nickel, copper and bauxite before exporting them.

This is an issue that became a hot topic during the recent election campaign, with Subianto’s running mate, former president Joko Widodo’s son Gibran Rakabuming Raka, alleging that one of his rivals was “anti-nickel.”

But even Indonesia’s lower-cost nickel operations, most of which have a Chinese and Indonesian shareholding base, are likely to be struggling in the current environment, so something will eventually need to give way.

More of this Indonesia-origin nickel has been making its way into LME warehouses since the exchange announced that it would introduce a fast-track listing approach for new brands of nickel. This move was made in an effort to rebuild liquidity on the LME, for which producers, traders and consumers alike had been clamoring.

From what BHP says, however, they might have been more careful what they wished for.

Recent data from the LME shows that, as of the end of January, there was 7,884 tonnes of Chinese nickel in LME warehouses globally, representing around 12% of the total on-warrant nickel volume.

That is 23% higher than in December, and up by 150% since the end of November. More Indonesia-origin brands of nickel are expected to continue to flow into warehouses while producers there continue to build-out nickel metal production capacity.

But the LME is not, of course, a nickel producer. Its warehouse stocks are a reflection of supply-demand fundamentals, at least they are supposed to be, and are a market of last resort for the physical industry.

Future

The fate of BHP’s Western Australia Nickel is not clear. The Nickel West assets are large – a fully integrated mine-to-market business, including open-cut and underground mines, concentrators, smelter and refinery.

Putting the entire unit on care and maintenance would be a blow, not just to the Australian economy but also to the workers across the operations, who number more than 2,500.

BHP has also said that it is assessing phasing and capital spend for the development of the West Musgrave project, acquired as part of its purchase of OZ Minerals, which is 21% complete.

Australian premier Roger Cook has already said that the government has some levers it can use concerning royalty relief and rebates, and is looking at all options in terms of how it can support the nickel industry. He will be facing a similar situation with lithium, another mineral that the country has prioritized due to its use in electric vehicles.

There could be several distressed nickel assets now in play around the world. Although timing is good for buyers, finding them might prove a little less straightforward, given the industry’s economics and cost profile.

In Hotter Commodities, special correspondent Andrea Hotter covers some of the biggest stories impacting the natural resources sector. Sign up today to receive Andrea’s content as it is published.