Resource stocks are expected to keep outperforming this year after rallying well ahead of the broader S&P/ASX 200 (Index:^AXJO) (ASX:XJO) in 2017.
While copper, iron ore and oil seem to be grabbing most of the headlines, it is nickel that might provide most of the excitement on predictions that there isn't enough of the mineral to meet the forecast growth of electric vehicles.
UBS is the latest to flag the potential looming supply-demand imbalance. The broker is expecting circa 16.5 million electric vehicles to roll off the production line in 2025 and that means an up to 40% increase in nickel demand (or 900,000 tonnes a year).
"The market is well supplied now, but the rapid evolution of this demand may mean we need new high-quality nickel supply," said UBS.
"Nickel producers of high grade nickel are not investing & are instead cutting production in some cases. There appears to be investment in sulphate plants which just convert nickel metal to nickel sulphate (ready for battery use), just not in new mine supply."
But predicting the impact and severity of any shortfall is not as straightforward as one might think. Battery technology may evolve to exclude the use of nickel while others point to the abundance of nickel and cobalt rich Limonite ores.
I don't have a ready answer for the first issue, but UBS has shed some light on Limonite. The problem with Limonite is the difficulty and cost in extracting nickel from this ore type.
Special High-Pressure Acid Leach (HPAL) plants will need to be built and the current price of nickel cannot financially justify the investment.
So, if Limonite is seen as a solution to filling the supply gap, it can only mean one thing – higher nickel prices.
That would be very pleasing news for our nickel producers such as Independence Group NL (ASX: IGO) and Western Areas Ltd (ASX: WSA).
Mining giant BHP Billiton Limited (ASX: BHP) is another beneficiary as it produces about a third of Australia's output of the mineral.
This is why I have a slight bias towards BHP compared to Rio Tinto Limited (ASX: RIO). I am also half expecting BHP to announce some sort of capital return when it hands in its earnings report card next month.
This could take the form of an off-market share buyback where franking credits can be distributed to shareholders, much like the recent exercise undertaken by Rio Tinto.
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