The Potential Impact Of Easing Indonesian Nickel Export Restrictions On Vale

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Vale (NYSE:VALE) is a diversified mining company and the world’s largest iron ore producer. Though iron ore sales account for a majority of the company’s revenues, Vale also has interests in the mining of base metals, particularly copper and nickel. Vale is among the world’s largest producers of nickel, and prices of the metal can have a significant impact upon the company’s stock price.

Nickel is mainly used in the production of stainless steel. With demand for stainless steel mainly correlated with industrial activity, prices of the metal have suffered due to weakness in Chinese economic growth. [1] However, there is a chance of a sharper fall in nickel prices, if the Indonesian government revokes a ban on unprocessed nickel exports instituted in 2014. The Indonesian government had banned unprocessed mineral exports in January, in order to boost domestic mineral processing capacity. Though the country relaxed restrictions on exports of copper, the ban on unprocessed nickel and aluminum exports still remains. With the Indonesian government considering a relaxation of export restrictions on bauxite, which is the precursor for aluminum production, there is a chance that the Indonesian government may also consider relaxing restrictions on unprocessed nickel exports. [2] In this article, we will take a look at the impact of this scenario on Vale’s stock price.

The Impact of Easing of Indonesian Nickel Export Restrictions on Vale

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Indonesia was the world’s largest producer of mined nickel ore in 2013, accounting for 440,000 tons, or nearly one-sixth of global nickel mine production. [3] With the imposition of the ban on nickel exports, Indonesia’s share of global nickel production declined to around 10% in 2014. [3] If the ban on unprocessed nickel exports remains in force in 2015, Indonesian nickel production is expected to decline further in 2015. However, if the Indonesian government were to relax its restrictions on unprocessed nickel exports, it would change the demand-supply dynamics in the market for nickel. Given the current weak global demand conditions for nickel, if Indonesia reverts to its previous levels of production and exports, there could be a significant downside to nickel prices.

In order to model this scenario, we will factor in a 15% decrease in realized prices for Vale’s nickel sales by 2021 over our current estimates, as well as a corresponding increase in margins for the company’s base metal mining division. We will assume that Vale’s production and capital expenditure plans remain unchanged in the alternative scenario. If we factor in these assumptions into our model, our price estimate decreases by around 15% from $6.44 to $5.44. Thus, if Indonesia eases restrictions on nickel exports, a downward revision in valuation could potentially follow for Vale.

See our complete analysis for this scenario here

 

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Notes:
  1. METALS-Copper falls on weak China outlook, nickel near 14-month low, Reuters []
  2. Indonesia Opens Room for Bauxite Export, Nickel Ore to Follow?, Indonesia Investments []
  3. World Nickel Production, U.S. Geological Survey [] []