Blindsided: The crash that rocked boardrooms and Australia’s wealthy investors

It is not often that seismic events in Indonesia rumble through the homes of Australia’s wealthiest rich listers and our biggest corporate boardrooms.

So there was a certain pathos to BHP effectively shuttering the remainder of Australia’s nickel industry the day after Indonesians elected a successor to the long-standing President Joko Widodo.

IGO’s Cosmos nickel mine in Western Australia.
IGO’s Cosmos nickel mine in Western Australia.Credit:

On Thursday, BHP chief executive Mike Henry confirmed that the mining giant was writing off its $US3.5 billion investment in nickel and effectively shutting down for the foreseeable future, putting thousands of jobs at risk.

“This is an uncertain time for the Western Australia nickel industry and we are taking action to address the current market conditions,” he said in a statement to the ASX.

Nickel was meant to be a rising star of Australia’s battery-driven green energy mining boom – alongside lithium and rare earths – with electric cars driving insatiable demand for these minerals. But nickel’s bright future has been swamped by a tsunami of supply out of Indonesia last year which slashed prices and shuttered Australia’s nickel sector seemingly overnight.

The nickel disaster has been on a slow burn since Widodo was elected Indonesia’s president in 2014 with aspirations to do more with the country’s mineral riches.

In 2020, he enacted a ban on the export of key minerals like nickel, to force businesses to value-add rather than just export the raw material overseas.

Chinese companies have now invested billions to process the ore. Indonesia, which has the world’s largest reserves of nickel, went from being a supplier of nickel for stainless steel production to a supplier of higher-grade nickel for the green energy boom.

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BHP blamed this flood of supply from Indonesia for the falling prices last year, but also pointed to the London Metals Exchange – the largest market for base metal trading – for accepting Indonesian-origin nickel.

The group confirmed that its nickel business ran at a loss for the December half and noted that “these unfavourable operating conditions are expected to endure for a considerable time.”

BHP’s Nickel West business employs about 2500 people and any downsizing of the West Australian mining operations, smelter in Kalgoorlie and refinery in Kwinana will reverberate across the industry.

BHP was the last domino to fall.

Late last month IGO was forced to put its nickel operations, the Cosmos Project, on ice with hundreds of job losses.

“The recent deterioration of the nickel price has led us to stop and reassess the future of this asset,” IGO’s chief executive Ivan Vella said.

That came barely a week after billionaire Andrew Forrest’s Wyloo Metals announced the temporary closure of the nickel mines it obtained through its acquisition of Mincor Resources in July last year.

Jobs will disappear at the Avebury Mine in Tasmania which is being shut by receivers.

“With no domestic nickel industry, Australia’s battery ambitions go out the window, along with downstream processing and our value-add place in the global supply chain.”

Rebecca Tomkinson from the Chamber of Minerals and Energy of WA

Even the doyen of commodities trading, Glencore Plc announced this week that it will sell its share of a nickel mine and a processing plant on the islands of New Caledonia, called KNS, due to the dire outlook.

“Even with the French government’s proposed assistance, high operating costs and current very weak nickel market conditions means KNS remains an unprofitable operation,” Glencore says.

A surge in supply from Indonesia has crushed nickel prices.
A surge in supply from Indonesia has crushed nickel prices.Credit: AP

This time last year, Forrest – Australia’s richest person – was in the middle of a nickel land grab with Mincor lined up as a takeover target barely a year after elbowing BHP aside to acquire Canadian nickel miner Noront Resources.

Even then, Forrest and Wyloo Metals were casting an eye northwards towards Indonesia’s nickel production and already had an answer for the carbon-intensive production methods needed to get Indonesia into the green energy game.

“People were prepared to turn a blind eye yesterday but tomorrow they may not be,” he told The Australian Financial Review last year.

Wyloo’s nickel investment is not just a normal bet on a promising metal for Forrest. This is his second attempt at establishing a reputation in the sector after the near-collapse of Anaconda Nickel which led to his ouster in 2001.

“I started my corporate leadership in nickel because I believe it is the most recyclable metal in the world and has a huge future,” he told the AFR.

The new year only confirmed that the entire industry was facing a nightmare scenario.

Late last month, BHP’s Nickel West boss Jessica Farrell met with resources minister Madeleine King for crisis talks saying afterwards it was a “wake-up call” and action was needed.

“For us in the nickel industry, [this] is an incredibly tough time at the moment,” Farrell said. “We are looking at a range of options to remain globally competitive in a very tough operating environment.”

More than a thousand jobs have gone from the sector since December and the Chamber of Minerals and Energy of Western Australia (CME) said this week that the losses could reach 10,000 – based on a report by research firm Mandala.

“The Australian and Western Australian nickel industry is facing significant economic headwinds. Production costs have risen almost 50 per cent since 2019 while nickel prices have declined 51 per cent since 2022,” CWE CEO Rebecca Tomkinson said.

“With no domestic nickel industry, Australia’s battery ambitions go out the window, along with downstream processing and our value-add place in the global supply chain. The situation is serious for lithium and other critical minerals but acute for nickel.”

Wesfarmers showed just how serious the situation is for lithium with its half-year results on Thursday, reporting that it is making a loss at current prices due to the higher cost of production.

The headwind hitting the entire sector can be traced back to the surprise slowdown in electric vehicle demand, which has forced the entire ecosystem of EV suppliers and manufacturers, like Tesla, to revise their expectations.

While lithium, rare earths and nickel have all been impacted by the e-vehicle downturn – the speed and scale of the nickel bust clearly blindsided mining veterans such as Forrest, and BHP.

As recently as September last year, BHP boss Mike Henry was extolling the virtues of its bet on nickel – along with copper. The demand for nickel over the next 30 years will be 400 per cent higher than the last 30, he told CNBC.

“We are right at the forefront of this growing demand for copper and nickel,” he said.

What he didn’t realise was that Indonesia had already made a successful play.

According to US publication Foreign Policy, Indonesia’s nickel exports were worth $US83 million ($127.8 million) when Jokowi took office in 2014. By 2022 it had exploded to $US5.8 billion ($8.9 billion).

“We’ve got this big supply response out of Indonesia. [The] Indonesian government gave a lot of these nickel producers tax holidays,” says Citi analyst Kate McCutcheon.

Indonesia’s producers upended the nickel supply chain by ramping up a technology called high pressure acid leaching (HPAL) – emissions-intensive refining that produces 10 tonnes of carbon for each unit of nickel, compared to an Australian mine’s output of two or three tonnes per unit, McCutcheon says.

The country’s lack of environmental, social and governance standards prompted Forrest to label it “dirty nickel”.

Adding insult to nickel’s injury are China’s ascendent battery maker CATL and major electric vehicle manufacturer BYD.

In just a few years, the country’s EV powerhouses have turned lithium batteries away from the once-dominant mix of nickel manganese and cobalt (NCM) towards lithium iron phosphate (LFP), reducing a key source of demand for nickel miners.

LFP batteries made up 66 per cent of China’s total battery output in the first half of 2023, according to Fastmarkets, even though the battery’s overall energy density is lower than their NCM cousins.

“Consumers are getting over range anxiety and the LFP battery technology is getting better and better,” McCutcheon said.

“Lithium wins in both situations, but nickel and cobalt do not.”

McCutcheon says there may be some relief for local nickel producers on the horizon.

“We have seen a lot of the HPAL projects that were being talked about in Indonesia actually get deferred,” she said. The feedback is Jokowi’s tax subsidies are likely to end as well, she adds.

Another factor that may tip the scales back in Australia’s favour is US President Joe Biden’s massive Inflation Reduction Act (IRA) subsidies that are supercharging America’s clean energy economy and corralling the critical minerals it needs to power its energy transition.

“There is not enough IRA-compliant lithium hydroxide to meet US battery demand, particularly when you overlay the foreign entity of concern regulations that the US is talking about introducing,” McCutcheon says.

“The bulk of the battery plants that we’ve tracked to be built out in the US are NCM battery plants,” she adds.

But whether or not Biden’s signature green policy survives a change in American political tenure to another Trump presidency is another unknown that will further destabilise the global outlook.

Lithium investors are more confident about the metal’s outlook than their nickel counterparts.

John Hancock isn’t giving up on his lithium investments just yet.

The estranged son of billionaire mining magnate Gina Rinehart – who herself has sunk a fortune into battery metal miners – is doubling down on the metal dubbed “white gold” due to its market value and silver colour.

“I’ve still [got] the vast bulk of my Vulcan holding and I’ve been buying some [more in] the last few months,” says Hancock of his favoured stock, the ASX listed but European-focused lithium brine producer Vulcan Energy Resources, whose shares have tumbled from a peak of $15.90 in September 2021 to $1.96 this week.

Vulcan’s plunge on the Australian bourse is mirrored by others in the nascent sector, which has been buoyed by some of Australia’s richest people jockeying for control of its future.

John Hancock is holding on to the vast bulk of his Vulcan stock and buying more.
John Hancock is holding on to the vast bulk of his Vulcan stock and buying more.Credit: Renee Nowytarger

Shares in Liontown Resources, which lists Gina Rinehart as its biggest shareholder, have also tumbled. When Rinehart built her 19.9 per cent stake it was trading at more than $3. Last month it hit 92¢.

“There’s only one way businesses can respond to that sort of price change in one year, and it will be blunt,” says Liontown boss Tony Ottaviano.

“It’ll be shutdowns, it’ll be headcount reductions.”

“In tougher times for pricing, look for companies that have lowest operating expenditure when in production, and have pricing stability with offtakes [existing contracts with buyers],” is Hancock’s advice.

He’s not the only one saying that playing the long game is still the smart option.

Citi’s McCutcheon points out that EV growth is still strong, it’s just weaker than people expected for now.

“We are still forecasting (lithium) markets be in a modest surplus until 2026. It’s 2028 when we model the big deficits kicking in.”

Patriot Battery Metals’ newly appointed chief executive Ken Brinsden says that China’s control of the market means it is subject to extreme volatility in the short term but there are indicators of what is a more reasonable price for lithium.

“If you’re focused on price, you might want to take a look at the price being paid for lithium chemicals in Japan and Korea, and it’s still well north of $30,000 a tonne. It’s not $13,000 or $14,000 a tonne. And I want to suggest that that’s actually a better representation of what the medium term really means in the lithium world as compared to the short game China plays,” he says.

This is certainly the line being taken by Wesfarmers boss Rob Scott, who has not been swayed on the long-term fundamentals of its investment.

“To be honest, not withstanding the volatility we’ve seen in recent months, nothing has really changed as far as we’re concerned.”

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