UBS Indonesia Nickel

Rally overdone, fundamentals still weak

A sentiment-based rather than a fundamentals rally
Although equity markets, by nature, trade ahead of fundamentals, we think the 103% rally in Indonesian nickel stocks is premature. We see no near-term recovery in nickel demand, and highlight that the metal is not a primary beneficiary of stimulus investment. As such, we believe Antam and PT Inco Indonesia are overvalued; we reiterate our Sell ratings on these stocks and cut our price targets.

Outlook for nickel remains weak
Nickel’s c400% price growth in 2005-07 resulted in significant new production and oversupply. This hit the market in mid-2008, just as demand was falling. Although much output has been cut since then, anecdotal evidence suggests that the nickel market will remain oversupplied this year.

Stainless steel profit warnings supports bearish sentiment
As stainless steel accounts for 65% of nickel consumption, we believe the sector’s bearish sentiment supports our expectation of further nickel demand and price weakness. For example, metal conglomerate ThyssenKrupp recently exhibited a Q109 loss in stainless steel earnings due to price weakness and inventory writedowns, which our European analyst expects to continue in Q2 and Q3 2009.

Implied nickel price at 70% premium to spot
We think Indonesian nickel stocks, Antam and Inco, are overvalued, trading at 17.4x and 33.2x 2009E PE. We highlight that although high mining multiples usually represent a cyclical trough, we think the 103% rally since October 2008 is overdone. We highlight that the implied nickel price is 70% above the spot price.