Why has Vale Opted to Reduce its Nickel Output

December 14th, 2017 by Trefis Team
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Vale (NYSE: VALE) is the world’s largest nickel producer. The company in its recent news release has reduced its production guidance for nickel for the next four years. [1] In an environment with a favorable demand condition for nickel, let us look at the factors which have influenced Vale to take this crucial decision.

Expectation of Enhanced Future Nickel Demand

The company made a downward revision to its nickel production by 8% for 2018 (Y-O-Y) in order to benefit from a future environment of increased Nickel prices. Nickel is a primary constituent used in the production of lithium-ion batteries used in the operation of Electric Vehicles (EVs). These batteries enable the vehicles to operate for a longer duration and hence are an integral part of the EV revolution. Given the environmental benefit that EV possesses, UBS expects 16.5 million global sales of electric vehicles by 2025, a revision to their earlier forecast of 14.2 million cars. [2] This would lift the demand for nickel by 10-40% of the current market.

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However, nickel prices have not soared as significantly as other metals used in EV production (like copper) even though the market for nickel is extremely favorable (depicted by the below price graph). This is mainly due to the fact that nickel is currently oversupplied, which has limited the ability of the metal to charge a premium for its price. However, this trend is presumed not to persist in the long term given that the demand for the metal is expected to surpass supply due to their extensive usage in EVs.
Vale plans to increase their nickel output gradually over time post the prices for nickel have been correctly valued. This expectation has been illustrated in the below graph. You can view our base case for Vale’s nickel segment here and create different scenarios using our interactive platform.

Reduction in Nickel Output Would Support Vale’s Debt Reduction Strategy

A decrease in the production estimate for nickel would remain in line with the company’s strategy of debt reduction. Reduced investment in the company’s nickel mine would reserve CapEx spending of up to $1.6 billion in 2017 and 2018. Furthermore, an expected rise in nickel prices would enable the company to maintain their cash flows from its base metal division. Thus, an enhanced level of cash flow coupled with reduced capital spending would allow the company to use their funds in retiring its long-term debts and improve its leverage position.

Several global nickel producers have already ramped up their nickel exploration and production process in order to take full advantage of the expected rise in future nickel prices. In such a given environment, estimating if it was sensible for Vale to reduce their nickel output would only be known over the course of time. We shall keep a close watch as these future developments take shape.

We have $10 price estimate for Vale, which is currently below the market.

Have more questions about Vale? See the links below.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such communication sparks thinking and encourages readers to comment and ask questions in the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Vale
Notes:
  1. Vale informs on estimates update, Vale News Release [↩]
  2. 16.5 million electric vehicle sales tipped for 2025, The Sydney Morning Herald [↩]