In the Trough of Nickel Cycle: Value Regress Perceived in Lygend Resources (2245.HK)

 

Nickel prices remained at a low position in 2023, posing a serious challenge to the global industrial chain.

 

According to its mid-term results by December 31, 2023, BHP Billiton Ltd., the largest mining company in the world, recorded an 86% drop YoY in net profits due to the impairment of nickel assets and other provisions in the first half of the fiscal year.

 

Nickel Asia Corporation, a nickel producer from the Philippines, reported a decrease of 53% YoY in net profits in fiscal year 2023.

 

Glencore, the world's largest commodity trader, had to close its nickel business on the island of New Caledonia in the South Pacific.

 

The domestic market in China also suffered from the impact of the nickel recession, and the future price of the main contract of nickel in the Shanghai Future Exchange plunged by more than 46% in 2023. In 2023, Lygend Resources as one of the few companies in China that focus only on the nickel business realized 21.059 billion yuan in revenues, up 15.1% YoY and up 26.8% HoH, and earned 1.051 billion yuan in net profits, down 39.4% YoY and up 110.9% HoH. Despite the year-on-year drop, the half-year-on-half-year figure shows a dramatic change in the situation in the second half of the year in comparison with the first half.

 

(Source: Tong Da Xin)

 

The general downturn of the nickel industry in 2023 reflects the fact that the global oversupply of nickel has not changed in the past two years. Besides, under the circumstance of the Fed's continuous interest rate hike, the stronger US dollar drove down the dollar-denominated nickel and other commodities. And the sluggish economic growth may hurt the demand for nickel and other industrial metals. So, the nickel price has kept a downward fluctuation under multiple impacts.

 

From a long-term perspective, however, the suppressing factors above are lifting.

 

On the one hand, the core inflation in the USA is retracting, and the risk of hiking recession, and the Fed faces more and more pressure for interest rate cuts. As Fed Chair Jerome H. Powell pointed out, if the inflation signal is right, the interest rate will be lowered this year. There is no definite timetable yet for interest rate cuts, the direction, however, is clear.

 

On the other, the nickel supply-demand situation has seen predictions for marginal improvement, and this will surely boost nickel price. Since the end of last January, the future price of the main contract of nickel in the Shanghai Future Exchange has risen by more than 10%, so is the prediction for better results with dedicated nickel companies.

 

It is still too early to say that the nickel cycle has returned, but we shall not overlook any indications of marginal improvement at the bottom of the trough.

 

I. Pyrometallurgical assets appreciate thanks to growing stainless steel demand

 

Nickel is principally used in stainless steel, and the demand for stainless steel is closely related to macroeconomic recovery.

 

A series of steady growth policies were released last year, and China's macroeconomy has thus maintained its pace of recovery. According to the Stainless Steel Council of China Iron and Steel Association, China produced 36.6759 million tons of crude stainless steel in 2023, up 12.59% YoY, and registered an apparent consumption of 31.0822 million tons, up 10.56% YoY.

 

From the point of theoretical argumentation, neither the financial measure of cutting taxes and fees nor the easy money policy of lowering the reserve requirement ratio and interest rate will do their job in booming enterprise production and resident spending. Insufficient effective demand, weakening public expectation, and sluggish domestic circulation are essentially the hurdles that lie on China's path to economic recovery.

 

The State Council executive meeting, therefore, passed the Action Plan for Promoting Large-Scale Equipment Renewals and Trade-ins of Consumer Goods, an initiative to promote investment and consumption by the renewal of obsolete farming machinery, education and medical equipment, and consumer goods like automobiles and home appliances.

 

Both equipment renewal and trade-in of consumer goods will generate enormous market demand, which will in turn propel the iron and steel business. And, it is nothing but natural that the demand for nickel, as a critical element that fortifies stainless steel properties like corrosion resistance, strength, toughness, and stability, will grow together.

 

More importantly, the nickel price has been low for a rather long period, as a result, stainless steel is also in the historical low in terms of price, and the more affordable stainless steel drives the upturn of nickel demand.

 

In general, pyrometallurgical processes are commonly adopted in the production of stainless steels for the very reason that they are mature technologies featuring higher productivity. Pyrometallurgy, however, has side effects like pollution to the environment, and Indonesia and other major nickel producers are liable to put restrictions on the expansion of such technological processes.

 

RKEF projects that are already in operation, therefore, will naturally see a rise in their value.

 

For example, Lygend Resources RKEF project (phase I) HJF was commissioned in October 2022, and, in 2023, all eight production lines were launched and reached the designed production capacity. Meanwhile, Lygend Resources has always been on the move to upgrade and transform metallurgical processes and equipment, improve thermal efficiency, cut costs on machinery maintenance and repair, and reduce energy consumption and production costs of the entire technological process. In the RKEF project (phase I) HJF line, the unit energy consumption in calcination, unit consumption of semi-coke, and unit consumption of brown coal in nickel production have all reached the advanced industrial level, and the annual cumulative ferronickel production of the RKEF project exceeded 70,000 metal tons of nickel.

 

Lygend Resources RKEF project (phase II) is under construction as scheduled, and upon completion will acquire a designed annual production capacity of 185,000 metal tons of nickel, boosting the company's pyrometallurgical output and sharing benefits from the increased industrial volume.

 

II. Leading hydrometallurgical processes benefit from NEV growth

 

While stainless steel manufacturers remain principal nickel consumers, the fast-growing new energy vehicles (NEVs) have brought about more demand for nickel.

 

The NEV industry as a benchmark player under the flag of new-quality productivity is highly critical to China to catch up with and overtake the foreign automaking industry. Thanks to policy supports and mature technologies, China's NEV production and sales grow continuously.

 

According to the China Association of Automobile Manufacturers, China made and sold 9,587,000 and 9,495,000 NEVs in 2023, up 35.8% and 37.9% YoY, respectively, and the market penetration increased by 5.9 percentage points to 31.6%.

 

In the middle to long-term perspective, the NEV penetration will continue to increase. Power batteries are the heart of NEV hearts, and will inevitably benefit most from this growing trend.

 

Between ternary lithium batteries and lithium iron phosphate batteries, there has been a long-standing argument. In application, however, both batteries have their respective scenarios, and, in terms of structure, an equilibrium has been achieved. And the NEV development will spur the demand for both batteries.

 

With ternary lithium batteries, the mainstream approach to increase energy density is to adopt nickel-rich cathodes. The range anxiety with NEVs will give rise to more demand for ternary lithium batteries, thus more nickel, and the historically low nickel price, as an extra advantage in cost, will further boost the penetration of ternary lithium batteries using nickel-rich cathodes.

 

Lygend Resources is one of the few nickel producers that have fully mastered the HPAL process of nickel laterite ore and has for the first time produced battery-grade nickel sulfate and cobalt sulfate in Indonesia. The completed HPAL projects have all exceeded their 100% production capacity.

 

When scrutinizing Lygend Resources HPAL projects from the point of view of new-quality productivity, i.e., technological innovation, efficient allocation of factors of production, and environment-friendly and sustainable development, we may better understand the long-term value of these assets.

 

1. Technological innovation

 

Lygend Resources HPAL projects adopt the third-generation mainstream HPAL processes, the most advanced technologies in the world for processing medium- and low-grade nickel laterite ore, in response to the call of new-quality productivity for technological innovation.

 

In the application of such technological processes, high temperature, high pressure, and concentrated sulfuric acid are used, posing a serious challenge to the enterprise in technical ability and operating experience. Lygend Resources as a leading player in the industry, highly experienced in project operation, finds in such technological barriers a great advantage.

 

2. Efficient allocation of factors of production

 

Generally speaking, HPAL projects usually end in failure or take a long time to reach the designed production capacity. Lygend Resources HPAL project (phases I & II) lines, however, all reached their production capacity within two months of commissioning. Meanwhile, the HPAL project is on the left end of the cost curve, and features the lowest out-of-pocket cost for nickel-cobalt compound projects, making a new industrial record thanks to Lygend Resources's continuous improvement and automation of production processes.

 

By the end of 2023, Lygend Resources HPAL project (phases I & II) had reached and exceeded the designed annual production capacity of 55,000 metal tons of nickel and recorded an annual output of more than 60,000 metal tons of nickel. The company products are widely celebrated for their high quality, and Lygend Resources is now building HPAL project (phase III), the main structure of which is already completed as scheduled.

 

3. Environment-friendly and sustainable development

 

The nickel ore after the principal metals of nickel and cobalt being extracted still contains several valuable metal constituents which can be reclaimed and utilized.

 

Lygend Resources is experimenting with the addition of a slag treatment process to its HPAL project and may acquire in the future the ability to reclaim metals from HPAL project slags, which will be a new growth point of profits as well as an effective solution to the slag-related environmental pressure and disposal cost.

 

III. Epilogue

 

In the past two years, the nickel price dropped from the 2022 high to a reasonable level, and the wide-range oscillation downward placed significant pressure on the profitability of the relevant enterprises. But, if we assume a mid-to-long-term perspective, we will find that low-end production capacity will be washed out, and surrender their market share to Lygend Resources and other leading manufacturers.

 

In the years to come, the trade-in policy and more NEV penetration will bring about more demand, and Lygend Resources's advantage in technology and cost will further ensure its growth as the industrial cycle returns.