Australian Market Notes – 14 November 2006


MELBOURNE AUSTRALIA, 14 November 2006 – Today we keep our attention on the resources sector.  Yesterday we gave a brief snippet on our thoughts for zinc.   We also mentioned nickel.  Well, as we trawl our way through the London Metal Exchange’s ‘Ringsider’ Metals Yearbook, we pause at the coverage of nickel.

It just so happens that we also notice that Western Areas NL (ASX: WSA), a Perth based miner (surprise) has announced its intention to increase nickel production at its Flying Fox mine from 12,000 tonnes to 17,000 tonnes.   Yet this is also hardly a surprise either considering that in late 2005 the price of nickel was USD$13,000 per tonne.

Then, as Anthony Warwick-Ching in the Ringsider describes it, “The New Year opened with a grudging lift in price, but not until Easter did nickel come in from the cold.   When it did, it caught fire.  Within a month of April Fool’s Day, LME cash was above USD$20,000/tonne.  Midsummer was greeted with USD$22,000/tonne, and three weeks after that the price hit USD$30,000.”

According to Reuters, other nickel miners are also trying to ramp up production, “Mincor Resources NL (ASX: MCR) last month said it also wanted to boost annual nickel production by 5,000 tonnes by digging more lodes in the ore-rich Western Australia nickel belt.”

While, “Australian Mines Ltd (ASX: AUZ), Fox Resources Ltd (ASX: FXR) and Jubilee Mines NL (ASX: JBM) are evaluating options to dig more nickel on expectations that demand for the metal will stay strong through at least the rest of the decade.”

The “rest of the decade” eh?!  Is that realistic?  Well, from what Warwick-Ching writes, it seems more likely than not.   And it would also seem that perhaps our domestic miners are being slightly over-optimistic with their plans to increase production.

Warwick-Ching writes that, “From an investor viewpoint, a cocktail of robust demand, uncertain supply and rising costs remains a potent brew.   Nickel is going to remain interesting terrain for some time to come.”

Specifically on the question of supply meeting demand he says, “… with consumption reviving strongly and set to remain buoyant, this doesn’t allay the burning question of the day: can the mining industry meet future demand for nickel?   The answer is – only with difficulty.”

So, although the price of nickel would seem likely to remain elevated for the next few years, it is even more debatable whether Australian miners in particular can take further advantage of the higher price by increasing production.

Considering the price has more than doubled in the past year we are sure their disappointment will be tempered somewhat.

One of the differences perhaps with nickel is that, as Warwick-Ching points out, “this is not just another China story.”   “Technical excellence will ensure a thriving stainless steel industry in Europe, the US and East Asia for many years to come.”

He goes on to say, “… the parts played by other uses for nickel, such as non-ferrous alloys, alloy steels and foundry products have mostly been very supportive with a strong second half of the decade set to make up for underperformance in the first.   Booming aerospace is keeping superalloys aloft, high nickel alloys are in strong demand for the energy sector and rechargeable batteries are accelerating fast.”

As far as resources go we seem to be spoiled for choice.

Kris Sayce
Kris Sayce, dubbed the ‘Jeremy Clarkson of Australian finance’, began as a London finance broker specialising in small-cap stock analysis on London’s Alternative Investment Market (AIM). Kris then spent several years at one of Australia's leading wealth management firms. A fully accredited advisor in shares, options, warrants and foreign-exchange investments, Kris was instrumental in helping to establish the Australian version of the Daily Reckoning e-newsletter in 2005. He is currently the Publisher, Investment Director and Editor in Chief of Australia's most outspoken financial news service — Money Morning.

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