Australian nickel subsidies
This piece contains a number of speculative inferences and readers should apply their own critical judgement and common sense to digest this opinion.
This will be the 3rd post covering Australian nickel in a short time, demonstrating how quickly and materially the scene has changed. Coverage in today’s Australian Financial Review has been pronounced, and all screenshots below originate from today’s coverage.
Production Credit Scheme
Members of the industry are lobbying the Federal government for a 10% “production credit scheme”, entailing a reimbursement of 10% on the costs of production for yet undefined ‘downstream’ products.
The ROI on cost to the government is inadequate and highly subjective to the underlying downstream product price assumptions; which would likely be influenced (down) by the impact of subsidised, but still unprofitable, Australian products increasing global supply. The purported benefits of $2.4 billion over 10 years are a drop in the ocean for an economy that represents an estimated GDP of $1.7 trillion per annum.
Strategic to critical reclassification
Nickel’s reclassification to ‘critical’ status is entirely at odds with the global supply dynamic for nickel as a commodity. Critical by it’s definition, implies scarcity; whereas the world is presently awash in cheap nickel products.
The fact that BHP has lost money more often than not, over the past 12 years, whilst operating what are likely Australia’s lowest-cost nickel producing assets; is also a strong indication that this reclassification is not really warranted by any means.
Government subsidies
I found the mention of ‘socialism’ very interesting in this context. Any student of history, would recall the infamous behaviours of socialist regimes where a ‘production at all costs’ mentality was undertaken without consideration of the economic value of output. Our government appears to be falling into the same trap here by ignoring the basic fact that our export commodities are sold within global markets.
There is absolutely no need to subsidise present loss-making production, which holds the potential to socialise losses but privatises profits should these commodity markets recover in terms of pricing. Free market principles should be followed as an alternative.
BHP midstream and rehab liabilities
There are some clever misdirections in today’s coverage. It’s no secret and publicly disclosed that BHP plays hardball with it's 3rd party ore suppliers. Once Wyloo’s (ex-Mincor) assets stopped producing and supplying BHP’s Nickel West’s concentrator and smelter - these midstream assets became distressed. Reflecting the reliance on supplementing or ‘sweetening’ BHP’s mining of lower-grade, disseminated nickel deposits with higher-grade and tenor sulphides from smaller, third party miners.
Rehabilitating assets that were built and have been operated since the 1960’s will likely be a very expensive exercise, especially given the contrast in environmental standards between the current and past eras. I think it’s extremely unlikely that BHP will suddenly shutter it’s Nickel West operations purely due to the material upfront remediation costs and provisions that would be incurred.
Comments by credible 3rd parties
Interestingly, our views on the structural shift in nickel markets are echoed by no less than BHP’s ex-CFO and present South32 CEO Graham Kerr. Mr Kerr paraphrases the sentiment expressed in our past discussions on nickel with the added gravitas of having had financial oversight over these assets in his past role.
A structural shift within a market, makes government intervention ineffective over the long-term - and we believe this is going to be the case here.
Mineral carbonation
Bizzarely, the notion of mineral carbonation was slipped in amongst the morass of nickel commentary; reflecting a ‘full-court’ PR press by BHP.
There is (likely) a strong reason why mineral carbonation is not considered eligible for accruing Australian Carbon Credit Units (ACCU). Carbon can react with a number of minerals at ambient temperatures, funnily enough this includes very common elements like iron. Indeed, there have been recent studies on carbon sequestration of iron ore mining waste itself.
Now would it be productive if the government amended its present definitions for the accrual of ACCUs to include mineral carbonation?
If so, BHP and other iron ore players would suddenly become the hottest game in town - being able to ‘mine’ a rich vein of government subsidies for no tangible benefit for society at large.
In conclusion, my opinion is that the government should follow free market principles and let the ‘invisible hand’ determine what the future holds for these operations.
Past posts on nickel:
Disclaimer: The information contained within this website and article is not financial advice and reflects the opinion of its author in a strictly personal capacity.
Sources:
https://www.afr.com/politics/federal/labor-plans-tax-credits-to-help-nickel-miners-20240218-p5f5tc
https://www.afr.com/companies/mining/albanese-heads-west-in-the-nick-el-of-time-20240216-p5f5gm
https://www.afr.com/companies/mining/inside-the-pub-at-ground-zero-of-australia-s-nickel-woes-20240218-p5f5uf
https://pubmed.ncbi.nlm.nih.gov/36282383/
https://pubmed.ncbi.nlm.nih.gov/32620820/