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Nickel

Renaissance Capital

14 January 2019

Metals & Mining

We are constructive on the outlook for nickel prices, given rapidly declining inventory days coupled with a continued market deficit forecast over the medium term, as continued growth in nickel pig iron production is broadly matched by strong nickel demand in stainless steel from Indonesia and China. Nickel prices have been under pressure and now render around 46% of the industry cash-burning. We believe this could lead to supply cuts, which could support higher nickel prices. From a longer-term perspective, we believe the electrification of the drive train could support increased demand for batterygrade nickel. Glencore and CRU forecast that nickel demand could grow by around 55% (c.1.1mn t) between 2017 and 2030 due to the metal requirements to enable the Electric Vehicle Initiative target of 30% EV market share by 2030.

We believe supply growth could be limited as we calculate the incentive price for new projects at $17,400/t. We see limited growth in nickel in pig iron, which remains at the upper end of the cost curve. We therefore believe supply could struggle to keep up with growing demand. The key downside risk is a cyclical demand downturn, driven by a potential pullback in global GDP growth rates due to escalating trade wars and higher interest rates and oil prices, which could put further pressure on over-indebted emerging markets.

Nickel cost curve (2.3mnt)

Figure 62: 2018E nickel cash costs plus sustaining capex, $/t

22,000
20,000
18,000	Incentive price: $17,600/t
16,000
14,000
$/t
12,000	Spot price: $11,081/t*			8,283Vale,		South32,9,665	American,Anglo10,212		ARM, 11,232
10,000	6,836Glencore,	7,009Norilsk,
	Average cash cost: $10,160/t
8,000
6,000
4,000
2,000
*Priced as at 8 January 2019
Figure 63: Nickel LME inventory days and price, $/t (RHS)
120				110					60,000
49,825
100									50,000
80	31,325			70	71				40,000
		28,972					60
60			20,774						30,000
Average exchange stock days, 45
40	31	31						33	20,000
			21					10,605
20	13								10,000
2
0									0
Jan-07 Jun-07	Nov-07 Apr-08 Sep-08 Feb-09 Jul-09	Dec-09 May-10 Oct-10 Mar-11 Aug-11 Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14		Jul-14 Dec-14 May-15 Oct-15	Mar-16 Aug-16	Jan-17 Jun-17	Nov-17 Apr-18	Sep-18

Note: Calculated as exchange inventory/global refined nickel demand*365.

Source: Bloomberg, Renaissance Capital

90th percentile: $14,776/t

70th percentile: $11,348/t

50th percentile: $9,314/t

Source: Bloomberg, CRU, Renaissance Capital estimates

Nickel inventory has reduced closer to long-term average levels. Further reduction in inventory may become price-supportive

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Renaissance Capital

14 January 2019

Metals & Mining

Nickel prices have been under pressure and now render around 46% of the industry cashburning. We believe this could lead to supply cuts, which could support higher nickel prices.

Figure 64: Percentage of Nickel cost curve that is cash-burning over time

59,999														% Cash burning										Nickel, $/t							Average LT cash burn																			70%
																																			56.5%	60.5%	57.5%	56.0%				60.5%
49,999	48,055							50.0%																															48.0%											60%
																																									45.0%		45.0%
39,999									41.5%											39.5%									42.0%											37.0%									40.0%	50%
																											35.5%	35.5%
										30.0%						26,899										27.0%								26.5%										32.5%				29.5%		40%
29,999																						23.5%	24.5%	24.5%								23.5%
							22.5%
																					18.0%				18.5%								16.0%			Average LT cash burn, 25.4%														30%
													14.5%						15.0%
19,999											12.5%	12.5%			11.0%			12.5%												13.5%	13.5%														14.0%	12.0%	14.0%	11,081 20%
						7.0%								6.0%		6.0%	6.5%
9,999	0.5%	0.0%	1.0%	4.0%	2.0%																																													10%
								10,459
-1	Mar 07	Jun 07	Sep 07	Dec 07	Mar 08	Jun 08	Sep 08	Dec 08	Mar 09	Jun 09	Sep 09	Dec 09	Mar 10	Jun 10	Sep 10	Dec 10	Mar 11	Jun 11	Sep 11	Dec 11	Mar 12	Jun 12	Sep 12	Dec 12	Mar 13	Jun 13	Sep 13	Dec 13	Mar 14	Jun 14	Sep 14	Dec 14	Mar 15	Jun 15	Sep 15	Dec 15	Mar 16	Jun 16	Sep 16	Dec 16	Mar 17	Jun 17	Sep 17	Dec 17	Mar 18	Jun 18	Sep 18	Dec 18	Spot	0%

Source: Bloomberg, CRU, Renaissance Capital estimates

Our long-term nickel price forecast of $14,000/t is around 5% below the 90th percentile of the nickel cost curve.

Figure 65: Nickel price vs cash costs* at the 90th percentile

Figure 66: Nickel price premium (discount) to the 90th percentile

	40,000		Cash costs, $/t							Nickel average price. $/t						60%	46%
$/t	35,000	25,461	23,297	19,074	21,898	24,934	22,585	19,893	18,877	15,436	14,508	10,404 13,130	11,530 14,285	14,680	14,000	40%		9%-	23%-	0%	8%-	22%-	24%-	11%-	23%-	34%-	34%-	11%-	24%-	9%-	9%-
													Forecasts
	30,000															20%
	25,000											15,833
	20,000															0%
	15,000																					Historical average, -13%
																-20%
	10,000
	5,000															-40%
	0	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017 2018E	2019E 2020E	2021E	LT (real)	-60%
																	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018E	2019E	2020E	2021E

*Cash costs net of by-product credits plus sustaining capex.

Source: Bloomberg, CRU, Renaissance Capital estimates

Source: Bloomberg, CRU, Renaissance Capital estimates

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Zinc

Low inventory levels of around five days are supportive for zinc prices at around $2,633/t. We forecast our long-term zinc price at $2,600/t, which is below our estimate of $3,017/t at the 90th percentile of the cost curve. We believe the incentive price to build new zinc projects is around $3,000/t. Glencore has around 400kt of latent zinc capacity that could come back over the medium term, and Gamsberg is ramping up to around 250k tpa by 2020.

Renaissance Capital

14 January 2019

Metals & Mining

Zinc cost curve (6mnt out of global supply of around 14mnt)

Figure 67: 2017 zinc cash costs plus sustaining capex, $/t

3,500

3,000

2,500

2,000

$/t

1,500

1,000

500

0

Incentive price: $3,000/t	90th percentile: $3,017/t

828Boliden,	AmericaNorth	1,253,(Vedanta)Hindustan	1,705(TECK),MineDogRed	(GLEN),Australia2,039	(SCCO)unitIMMSAMexican, 2,414	TrailMine (TECK), 2,541	(TECK),MineOreillePend 2,616	Nyrstar, 2,805	Noranda, 2,864	Manitoba, 2,889	Votorantim, 3,017
Spot price: $2,575/t*
Average cash cost: $2,116/t
	(GLEN),1,011
	Griffin,1,079

Estimated top, 3,318

*Priced as at 8 January 2019.

Source: Bloomberg, Company data, Renaissance Capital

Figure 68: LME inventory days of zinc slab demand and price, $/t

45	3,587																		3,596				4,000
40		33							37									2,853					3,500
35																							3,000
				2,529							29
	28													2,367
30
																							2,500
			1,897
25					20																2,5192,000
														18
20
		Average exchange stock days, 17
																							1,500
15				11													11
																							1,000
10																				6	5
			4																4			3	500
5
0																							0
Jan-07	Jun-07	Nov-07	Apr-08 Sep-08	Feb-09 Jul-09 Dec-09 May-10	Oct-10 Mar-11	Aug-11	Jan-12	Jun-12	Nov-12	Apr-13	Sep-13	Feb-14	Jul-14	Dec-14	May-15	Oct-15	Mar-16	Aug-16 Jan-17 Jun-17	Nov-17	Apr-18	Sep-18

Note: Calculated as exchange inventory/global zinc slab demand*365.

Source: Bloomberg, CRU, Renaissance Capital

Zinc inventory days are well below long-term average levels

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Diamonds

In Alrosa’s view, synthetic diamonds seem to be of little concern to the midstream and jewellery segment, as they are sceptical about this product replacing naturals. The base case, according to people in the industry, is that synthetics will be fashion jewellery for everyday use (Swarovski-like, rather than Tiffany-like products).

Renaissance Capital

14 January 2019

Metals & Mining

Synthetics not seen as a major threat

Diamonds cost curve (106mn cts)

Figure 69: 2017 diamonds all-in sustaining cash costs, $/ct

280

Incentive price: $260/ct

240

Spot price: $207/ct*

200

90th percentile: $190/ct

209

Catoca mine,195

198

160

pit

-1 pipe, 183

Aikhal mine, 188

Rio Tinto, 190

pipe,

Average cash cost: $142/ct

180

152 153

153 153

Petra,

(JV) Petra,-

120

Petra,

pipe,

-

-

(Nyurba),

underground

Canada,

80

Finsch

deposits

Cullinan

mine,182

Zapolyarnaya

40

Botuobinskaya

Namdeb,20

Internatsionalnymine,39 deposits(Mirny),Aluvial75

Jubileepipe,92

Debswana,99

mine,122Mir

Canada,Beers152De

BeersDe

Nyurbinsky,153

Alluvial

Africa,BeersSouth156De

Udachnayamine,open159pit

AnabaraAlmazyNizhne&-

Lenskoye,171

Udachnaya

Karpinskogo Arkhangeskayapipe,184

KEM

0

*Priced as at 8 January 2019.

Source: Bloomberg, CRU, Renaissance Capital

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