[Reuters Analysis] China's grip on global nickel supply tightens with Anglo sale: Andy Home

By Andy Home

LONDON, Feb 24 (Reuters) - Anglo American's AAL.L sale of its Brazilian nickel business to China's MMG Ltd 1208.HK is a corporate win-win.

Anglo gets to deliver on its promise to shareholders to simplify its portfolio and pockets up to $500m.

MMG, which is already a major producer of copper, cobalt and zinc, gets to diversify into another metal and expand its geographic footprint into Brazil.

It is also buying into the one part of the nickel market that is showing signs of price resilience amid a glut of over-supply.

But it's not such good news for Western countries looking to escape China's tightening grip on the global nickel supply chain.

Chinese companies already control around 75% of refining capacity in Indonesia, which has rapidly emerged as the world's largest supplier.

And with two other Western producers looking to offload their nickel operations due to low prices, China's market dominance could yet grow further.

PRICE DEVASTATION

Anglo's Brazilian assets comprise two mines and two processing plants with annual combined capacity of 40,000 metric tons of nickel.

Both plants produce ferronickel for the stainless steel sector, which is still the largest consumer of nickel despite the metal's growing use in electric vehicle batteries.

This segment of the nickel market was the first to feel the full force of Indonesia's production boom, which initially came in the form of a competitor stainless steel input called nickel pig iron (NPI).

Such Class II nickel products always trade at a discount to the high-purity Class I refined metal traded on the London Metal Exchange (LME)

But Indonesia's production surge caused the discount to LME prices to balloon from an average 8.4% in 2001 to 27.2% in 2023, according to MMG's investor presentation on the deal.

It was a double whammy for Class II producers since the LME price was simultaneously collapsing.

Around half of the world's ferronickel production outside of China and Indonesia is now suspended, according to Macquarie Bank analyst Jim Lennon.

CARBON EDGE

Anglo's Brazilian operations are among the survivors.

They are low-cost and still cash-flow positive despite the collapse in the London Metal Exchange (LME) nickel price CMNI3 to four-year lows below $16,000 per ton.

Anglo's ferronickel sells at a premium relative to other Class II products due to its quality and green credentials relative to Indonesian NPI.

Carbon footprint is assuming greater significance in the stainless sector. The European Union's Carbon Border Adjustment Mechanism, which will tax higher-carbon imports, is due to come into force next year.

TURNAROUND

Even as the LME nickel price has continued sinking under the weight of rising inventory, much of it Chinese and Indonesian, the Class II market has turned.

The discount to the LME nickel price narrowed to an average 25% over the first half of last year, according to MMG. That for Anglo material tightened to 15.9% from 20.8% in 2023.

Supply has been constrained both by the mass closure of capacity in the West and a change of product mix in Indonesia.

Many Indonesian operators have switched their furnaces from producing NPI for the stainless steel sector to producing either nickel matte or mixed hydroxide for the battery sector.

Macquarie's Lennon estimates the Class II market was at best balanced last year as Indonesian surplus transferred to the Class I segment of the market.

The glut is now all too visible in the form of LME warehouse stocks, which more than doubled last year and have risen another 30,000 tons to 192,828 tons so far this year.

STRATEGIC METAL

MMG is betting the supply glut won't last beyond this decade, when a combination of steady growth in global stainless steel production and exponentially higher demand from the battery sector will create supply deficits.

If so, the company will be well positioned to reap the rewards. Anglo's nickel assets sit on the world's third largest resource of the metal, capable of transforming MMG into one of the world's largest producers outside of Indonesia.

And although the Brazilian operations currently produce ferronickel, that doesn't mean they couldn't go down the Indonesian route and be reconfigured to produce battery inputs.

China is evidently still taking a strategic view of nickel, even though it has lost much of its battery metal lustre in the West.

Brazil's Vale VALE3.SA has just booked a $1.4 billion impairment against its Thompson nickel operations in Canada and launched a strategic review of the business. It's unlikely the Canadian government would tolerate Chinese ownership but Thompson is not the only nickel asset up for grabs.

Australian miner South32 S32.AX is also looking to sell its Cerro Matoso ferronickel operations in Colombia "in response to structural changes in the nickel market," it said in its Q4 2024 report.

Those structural changes have been wrought by Chinese investment in Indonesia. The resulting supply tsunami and price collapse means China can now double down on its long-term bet that nickel is still a critical metal for the energy transition.

The opinions expressed here are those of the author, a columnist for Reuters