Australian Nickel First Half 2024 - The Opportunity Cost into the Future

Globally, there is a significant push towards the decarbonisation of economies, particularly within Western nations. The focus is increasingly shifting away from fossil fuels towards environmentally friendly renewable energy sources and battery storage, pushing for greater energy sustainability. Businesses are now compelled to adhere to Environmental, Social, and Governance (ESG) standards, which often necessitate substantial capital investment. This drive for ESG compliance is often motivated by stakeholders who aim to bolster their environmental and social credentials. However, it can sometimes lead to superficial efforts, commonly known as 'greenwashing,' particularly due to the complexities and inconsistencies in applying measurement standards across different geographical regions.

In addition to ESG considerations, there is a growing push for ethical investment practices within supply chains. This includes the requirement for corporate directors to endorse anti-corruption policies and modern slavery statements, addressing the risks associated with these issues in both their operations and global supply chains.

In the past six months, Australia has witnessed the shutdown of several nickel and cobalt businesses. These closures are largely due to rising operational costs and the economic pressures that have forced some companies into care and maintenance phases. Meanwhile, the market has been temporarily saturated with cheaper nickel supplies from Indonesia and the Philippines, further impacting local producers.

The graph below highlights the significant impact of low nickel prices on Australian producers, driven by an influx of cheaper, dirty nickel from Indonesia. This market shift has forced several Australian nickel producers to cease operations in the first half 2024. Notably, BHP Nickel West has halted large production, followed by IGO Nickel with 21kt, Panoramic Resources Ltd with 15.5kt, and Mallee Resources’ Avebury mine with 10kt. This trend underscores the broader challenges the industry faces as global supply chain dynamics shift, affecting local economies and market stability.

The cessation of six operations will remove approximately 155 kilotonnes (kt) of nickel from the global supply chain, accounting for 4.5% of the total global nickel demand. This deficit may be filled by cheaper nickel from Indonesia, or we might see an increase in nickel prices due to this disruption. Importantly, the boom in battery minerals is not expected to diminish anytime soon, nor is the demand for stainless steel, given the anticipated addition of 2 billion people to the global population and the sustainability needs of the current 8.3 billion people. Additionally, the rise of global conflicts linked to right-wing extremism and the subsequent human destruction will likely increase demand for these resources within the rebuilding industry.

If you think why these nickel producers are shutting down in Australia, it’s not just about the nickel market price, Although Australian operations still generate significant margins, they don’t match the profits from the likes of iron ore or coal.

The diagram above illustrates the company dynamics:

Company Directors: They face many risks, and reputational damage aligning with extensive government regulations while trying to satisfy shareholders’ return on investment expectations. Alongside maintaining their own board Metrix of DEI (Diversity, equity, and inclusion), where they face challenges to ensure bringing in the right people at the right chair.

Company Operators: They are under immense pressure to meet reporting requirements and improve operations around decarbonisation, ESG reporting, DEI targets, skills, technology, and managing increased Labor costs and shortages due to inflation.

ASX Investors/Shareholders: They seek high returns on their investments and are increasingly favouring greener initiatives influenced by international climate meetings like COP (Conference of the Parties an international treaty organised by the U.N. Framework Convention on Climate Change (UNFCCC), which the Australian government and very few EU countries are seen taking more actions than other countries like USA, Indonesia, etc).

An important factor to consider is that miners and mineral producers in Australia are the best in the world, in terms of compliance and regulations. Project development processes like the JORC, EPA, mining, and processing technologies, and SaaS technologies have no competition globally, instead, it is something Australia is exporting in a significant portion of the trade balance. We are leaders and set the precedence for the world to follow. However, the Australian government and policymakers are making these processes harder and more challenging, making it less attractive for investors to continue investing in Australia and the cost of doing business is becoming more and more expensive. These factors collectively contribute to the challenges faced by Australian nickel producers, which come at a very painful cost to the industry.

Currently, on average the time to bring a mine online in Australia is 13.5 years. With more red tape being considered by the government for Australian mining companies, such as the addition of ESG in mineral reporting under the upcoming JORC 202x standards, and stricter environmental approvals process, the lead time is expected to increase further. These changes, aimed at aligning with COP initiatives, make Australia less attractive for resource sector investors.

In contrast, Chinese and Indian operators in Africa and Indonesia, face fewer compliance requirements or bending the whole thing by briberies and modern slavery, while those governments are keeping closed opinions on these issues as they are economic growth for those regions. I recommend watching the recent BBC report on the devastating impact of nickel mining pollution in Indonesia. ?Indonesia facing 'devastating' impact of nickel mining pollution - BBC News

?The influx of cheap, dirty nickel continues to flood the market. This raises the question: why enforce ethical sourcing and modern slavery laws, adding red tape to doing business in Australia? This is the opportunity cost of Australian nickel, while the rest of the world operates differently. Where are the UNFCCC’s COP rules for other countries? Geographical boundaries and politics allow many sovereign nations to ignore these regulations, while Australian company directors face stringent rules, forcing them to shut down operations.

More importantly, ask yourself, are you happy with your suppliers, and are you willing to pay less or more for the decarbonisation of the world? Are you willing to offload your sustainable needs for your lifestyle.

"Money makes the devil work" is a Chinese proverb often cited in business. However, the productivity of nickel from Indonesia is set to decline rapidly due to geological challenges. The country's lateritic nickel deposits, formed from deeply weathered rock with high iron and clay content, require extensive rainforest clearance before ore processing. Additionally, as mining progresses and the orebody becomes increasingly water-bearing, overburden and waste disposal become problematic, transforming the mine into a virtual "bowl of soup." These factors contribute to rising processing costs and declining ore grade, ultimately reducing nickel productivity in Indonesia.

In light of these challenges, investors must act with informed caution. The slow approval process for mines in Australia represents not just a bottleneck but also a potential missed opportunity if not navigated wisely. As Indonesia’s nickel productivity faces geological hurdles that will likely escalate costs and diminish yield, Australian nickel stands as a crucial alternative. Investors who exercise due diligence now may find themselves at an advantage when Indonesia’s supply falters. Therefore, keeping abreast of developments within this sector is essential for capitalising on emerging opportunities and mitigating risks associated with global market fluctuations.

With that thought, I will leave you with a document prepared by ABC Australia in May 2024, The hidden cost of your electric vehicle: Indonesia’s nickel nightmare丨ABC News

This report is for informational purposes only. Conduct your own due diligence. Masud Hossain and Abridged Pty are not liable for any losses.