Australian Resources Sector Preview

Submitted by Jim Thesiger on 13 June, 2008 - 14:38

Australian Resources Sector Preview provided by Australian market analyst UBS.

Resources Sector – Nickel looking more stainless!

The large cap resources sector has fallen 12% in the past three weeks, following a broader market sell off. The recent commodities boom has seen a raft of explorers and producers enter the market, and this surge has created concern that the increased production in future years could push global commodities markets into surplus supply, putting a drag on prices. One metal that has suffered from this is Nickel, but recent announcements have changed our view on this. Let’s look at why…..

Source: IRESS Daily

BHP Announces closure of Kalgoorlie Nickel Smelter

BHP yesterday announced the immediate shutdown of their Kalgoorlie nickel smelter. The shutdown for re-building is estimated to last four months and was originally pencilled to occur late next financial year. However, the planned re-build has been brought forward following a recent assessment of the furnace condition. One could also suggest that the recent gas-supply shortages following the Varanus Island gas explosion may also have had an effect on BHP’s decision to re-build early. BHP will now divert gas to it’s Worsley alumina refinery.

What Effect will this shutdown have?

Macquarie Research Equities were looking for a Nickel Supply surplus of ~30kt of Nickel this year and next. This oversupply would presumably place downward pressure on Nickel prices. However, MRE estimates that the BHP shutdown could reduce BHP’s nickel production by ~ 28kt. The effect of this would be to bring Nickel supply back into equilibrium, and possibly even deficit. This is significant news for potential Nickel prices, and MRE believes it could stimulate a swift move back towards US$14/lb in the short term.

Who will benefit from this?

This near term market catalyst is a positive for junior Nickel miners, with Western Areas one of MRE’s preferred exposures.