Result review: Strong 2Q margin; Class-I were the winners

All local nickel producers under our coverage posted significant margin recoveries following the rise in intermediaries’ prices and the resolution of RKAB permits. Some players yielded better result – in particular, class-I producers such as NCKL (Buy). Going forward, we should see more nickel sales ramp-up backloaded in the last quarter of 2024, while we expect smelters’ cash margins to normalize from their 2Q highs following the fall in LME nickel prices. For context, we maintain our view for FY24F smelters’ margin as follows: ~USD1,000/t for NPI, ~USD2,000/t for Matte, and ~USD5,500/t for MHP. These number act as our basic assumptions determining the typical value of smelters and may vary depending on a company’s competitive positioning.

Nickel industry update: 1) Robust export growth; 2) Weather delayed miners’ production

Reiterating the view we presented in our most recent report: Volume growth vs normalizing margins, supported by high industry growth, we believe producers with volume growth and healthy margin will benefit most. Cumulative production until July 2024 reached 795kt in nickel content, reflecting a 3.8% y-y increase, according to SMM. To date, total 6M24 iron and steel exporst increased by 30% y-y from the same period last year (Fig. 5 and Fig. 6). Indonesia's nickel product exports saw significant growth, with NPI export increasing by 26% y-y in 6M24, with MHP posting strong 81% y-y export growth at 668kt (for the same period driven by expanded production capacity). Nickel matte saw a drop by -16% y-y.

In the second quarter, above-average rainfall affected mine production and ore deliveries across Indonesia's industrial park. Although the impact on nickel intermediaries’ production was limited, the disruption in high-grade ore supply forced some smelter producers to continue relying on lower-grade ore stockpiles within the park, which could put cost at risk.

Outlook: Cost push driving up intermediaries’ prices, while NPI demand stronger ahead of the peak stainless steel production season

Despite the RKAB approval quota for Indonesian laterite nickel ore reaching 240mn wmt in July (target FY24 250mn wmt), mining volumes remained constrained by heavy rainfall, keeping nickel ore prices elevated and trading at a premium vs the index. This situation is further evidenced by the rise in imported Philippine nickel ore (see Fig. 7). Class-I prices, such as for MHP and sulfate, have normalized (-7% and 14% q-q, respectively) following the decline in LME prices. In the Class-II market, a stronger yuan, limited ore inventory, and rising costs are driving NPI prices upward, reaching the USD12,500/t level in August. Moreover, although market data continues to show mixed signals, we believe demand for NPI should remain stable, approaching the peak stainless steel production season in China (Sep-Oct). However, with looming stainless steel price decline (see Fig. 3) and expected losses, the increase in production could face challenges. That being said, the upward price trend is unlikely to be sustainable in the long term for NPI, in our view.

This scenario, in our view, favors upstream companies such as ANTM (Buy) and MDKA (Buy), which could sell their ore at premium prices, while NCKL and MDKA are likely to benefit from rising NPI prices due to their integrated operations.

Recommendation: Maintain Buy stance on the covered companies, with nickel ore producers expected to be the key beneficiaries; stocks for action: ANTM > MDKA > NCKL > HRUM > INCO

We believe that current stock prices have largely accounted for market expectations, leaving limited impact on companies within our coverage. In the short term, we favor companies that 1) specialize in ore sales, 2) are ramping up production capacity, and 3) are integrated producers that are better positioned to protect against nickel ore price premiums. Based on the reason above, in the short term, our top picks are:

1) ANTM (Buy with TP of IDR1,900) — Growing nickel ore producer, strong 2HF recovery expected;

2) MDKA (Buy with TP of IDR3,700) — We expect recovery supported by increasing ore sales and commissioning of AIM project;

3) NCKL (Buy with TP of IDR1,260) — Still the most prudent integrated producer known for its lowest cash costs, strong execution, high ROE compared to peers, and attractive valuation;

4) HRUM (Buy with TP of IDR1,920) — One of beneficiaries of higher LME prices, with fastest production growth from its Class-I nickel matte, along with what we view as an undemanding valuation;

5) INCO (Neutral with TP of IDR4,000) — Top ESG producer with strong execution.

Fig. 2: Nickel intermediaries prices

Fig. 3: Limited movement for stainless steel price

Fig. 4: Chinese smelters still operate at loss

Fig. 6: Nickel intermediaries exports

Fig. 7: Indonesia imported more ore from the Philippines

Fig. 8: We maintain our 2024F cash margin assumption on the back of better nickel prices

Fig. 9: Nickel stock share price performance

Fig. 10: Peer comparison