LONDON, Feb 24 (Reuters) - Anglo American's sale

of its Brazilian nickel business to China's MMG Ltd ( MMLTF ) is

a corporate win-win.

Anglo gets to deliver on its promise to shareholders to

simplify its portfolio and pockets up to $500m.

MMG, which is already a major producer of copper, cobalt and

zinc, gets to diversify into another metal and expand its

geographic footprint into Brazil.

It is also buying into the one part of the nickel market

that is showing signs of price resilience amid a glut of

over-supply.

But it's not such good news for Western countries looking to

escape China's tightening grip on the global nickel supply

chain.

Chinese companies already control around 75% of refining

capacity in Indonesia, which has rapidly emerged as the world's

largest supplier.

And with two other Western producers looking to offload

their nickel operations due to low prices, China's market

dominance could yet grow further.

PRICE DEVASTATION

Anglo's Brazilian assets comprise two mines and two

processing plants with annual combined capacity of 40,000 metric

tons of nickel.

Both plants produce ferronickel for the stainless steel

sector, which is still the largest consumer of nickel despite

the metal's growing use in electric vehicle batteries.

This segment of the nickel market was the first to feel the

full force of Indonesia's production boom, which initially came

in the form of a competitor stainless steel input called nickel

pig iron (NPI).

Such Class II nickel products always trade at a discount to

the high-purity Class I refined metal traded on the London Metal

Exchange (LME)

But Indonesia's production surge caused the discount to LME

prices to balloon from an average 8.4% in 2001 to 27.2% in 2023,

according to MMG's investor presentation on the deal.

It was a double whammy for Class II producers since the LME

price was simultaneously collapsing.

Around half of the world's ferronickel production outside of

China and Indonesia is now suspended, according to Macquarie

Bank analyst Jim Lennon.

CARBON EDGE

Anglo's Brazilian operations are among the survivors.

They are low-cost and still cash-flow positive despite the

collapse in the London Metal Exchange (LME) nickel price

to four-year lows below $16,000 per ton.

Anglo's ferronickel sells at a premium relative to other

Class II products due to its quality and green credentials

relative to Indonesian NPI.

Carbon footprint is assuming greater significance in the

stainless sector. The European Union's Carbon Border Adjustment

Mechanism, which will tax higher-carbon imports, is due to come

into force next year.

TURNAROUND

Even as the LME nickel price has continued sinking under the

weight of rising inventory, much of it Chinese and Indonesian,

the Class II market has turned.

The discount to the LME nickel price narrowed to an average

25% over the first half of last year, according to MMG. That for

Anglo material tightened to 15.9% from 20.8% in 2023.

Supply has been constrained both by the mass closure of

capacity in the West and a change of product mix in Indonesia.

Many Indonesian operators have switched their furnaces from

producing NPI for the stainless steel sector to producing either

nickel matte or mixed hydroxide for the battery sector.

Macquarie's Lennon estimates the Class II market was at best

balanced last year as Indonesian surplus transferred to the

Class I segment of the market.

The glut is now all too visible in the form of LME warehouse

stocks, which more than doubled last year and have risen another

30,000 tons to 192,828 tons so far this year.

STRATEGIC METAL

MMG is betting the supply glut won't last beyond this

decade, when a combination of steady growth in global stainless

steel production and exponentially higher demand from the

battery sector will create supply deficits.

If so, the company will be well positioned to reap the

rewards. Anglo's nickel assets sit on the world's third largest

resource of the metal, capable of transforming MMG into one of

the world's largest producers outside of Indonesia.

And although the Brazilian operations currently produce

ferronickel, that doesn't mean they couldn't go down the

Indonesian route and be reconfigured to produce battery inputs.

China is evidently still taking a strategic view of nickel,

even though it has lost much of its battery metal lustre in the

West.

Brazil's Vale has just booked a $1.4 billion

impairment against its Thompson nickel operations in Canada and

launched a strategic review of the business. It's unlikely the

Canadian government would tolerate Chinese ownership but

Thompson is not the only nickel asset up for grabs.

Australian miner South32 ( SHTLF ) is also looking to sell

its Cerro Matoso ferronickel operations in Colombia "in response

to structural changes in the nickel market," it said in its Q4

2024 report.

Those structural changes have been wrought by Chinese

investment in Indonesia. The resulting supply tsunami and price

collapse means China can now double down on its long-term bet

that nickel is still a critical metal for the energy transition.

The opinions expressed here are those of the author, a

columnist for Reuters

(Editing by David Evans)