Where next for nickel?

In a year that has witnessed an exceptionally volatile nickel market, Myra Pinkham collects expert metal analysts' views on the causes and their opinions on the outlook for the vital base metal now

It has been an extraordinarily volatile year for the nickel market, including some big price swings that were not tied to traditional supply-demand dynamics but rather the uncertainty of what impact such factors as the war in Ukraine and Chinese Covid-related lockdowns will have upon the global economy – and therefore demand for nickel and other base metals. A strong short squeeze on nickel in trading on the LME has disrupted the market.

There are also questions about whether in the medium to long-term there will be enough nickel supply – particularly Class 1 nickel – to meet an expected growth in demand for nickel-containing electric vehicle (EV) batteries.

Given recent events, the nickel market has been seeing more fireworks than other metals, noted Edward Meir, head of research for ED&F Man Capital Markets, although there is no question that this year has also been an unprecedented one for many metals and other commodities.

A disrupted market

Some market participants had been taking a short position in the nickel futures market at a time of high prices, which they believed would subsequently fall and bring them a good return. But once Russia invaded Ukraine nickel prices actually surged. That resulted in extremely expensive margin calls and in some cases necessitated companies to buy more nickel contracts to offset their short positions, thus exacerbating an already very volatile, but upward trend in pricing.

Meir recalled that already by March 1, shortly after Russia’s invasion of Ukraine, LME nickel prices went up from $25,000 per tonne, which was already considerably higher than it had been for several years, to about $55,000 per tonne, before then briefly retreating to about $35,000 per tonne. But it was the short squeeze that really drove nickel prices through the roof, first rising to about $48,000 per tonne on March 7 before some trades surged as high as $80,000-$103,000 per tonne the following day.

In its response, the LME not only temporarily halted nickel trading, but it canceled some of the trades that were conducted on March 8 and implemented circuit breakers on nickel trading. Michael Haigh, head of commodity research for Société Générale, said that this action is expected to avoid similar problems in the future and to encourage traders to come back to the market without having to worry about such sharp price spikes and strong short squeezes.

Andrew Cole, Fastmarkets principal metals and mining analyst, observed that even though the market is still somewhat hungover from the drama in March, for much of April nickel prices had stabilized in a $30,000-$35,000 per tonne trading range. “But given that its fundamentals have started to look softer than we previously envisaged, we would not be surprised if nickel starts to trade lower,” as has already been the case for other base metals, he noted in Fastmarkets’ April 26 Base Metals Tracker.

Christian Georges, head of commodity research for Société Générale, agreed, stating that about $25,000 per tonne would be more appropriate based on market dynamics. “But where they go from here depends upon the global economy,” he said, noting that if there is an economic slowdown in China or elsewhere in the world nickel prices could ease slightly in the second half. This, Geordie Wilkes, head of research for Sucden Financial, noted, comes after global nickel fundamentals have been very bullish for quite some time.

However, with the nickel market going through a lot of structural changes on both the supply and demand sides, Amanda Eglinton, associate director of economics for S&P Global’s pricing and purchasing service, said there is still some uncertainty about the future.

Nickel for EV batteries

Even though the two major nickel-consuming sectors – stainless steel and EV batteries – are expected to continue to see increased demand this year, Richard Ferreira, director of market research and statistics for the International Nickel Study Group (INSG), said that, largely due to new investments in Indonesia and recovery in several other countries, the increase in nickel supply could be greater than nickel usage this year.

While the INSG has forecast that this could result in the global nickel market switching over from a 168,000 tonne deficit in 2021 to a slight surplus (of approximately 67,000 tonnes) this year, Cole said that he believes the market will remain in deficit, albeit a much smaller deficit, of about 37,000 tonnes.

Cole explained that one big contributing factor to this shift is the re-emergence of Covid-19 cases and lockdowns to control its spread in China.

Nevertheless, he said that there is a likelihood that the Chinese government will ease its monetary policy to promote a post-Covid economic recovery. That, he said, could potentially see net-positive nickel demand in the second half of this year.

Robin Bhar, an independent metals consultant, said that at least in the near term there continues to be some potential for prices to move higher for a short period of time before correcting, albeit likely staying at or above the pre-crisis $20,000 per tonne level throughout 2023 and 2024. He said that short-term firming would depend upon whether Russian nickel is directly sanctioned.

While, overall, Russian nickel accounts for about 6% of global supply, Meir noted that it supplies approximately 17% of the world’s Class 1 nickel (or nickel sulphate), which is already in tight supply. In fact, Société Générale’s Georges said there is twice as much Class 2 nickel (nickel laterite) than Class 1 nickel, which is the type of nickel that is used in EV batteries.

Haigh said that one reason why nickel prices were already elevated before the war in Ukraine is the part that the metal is expected to play in the green transition, noting that by 2040 its usage could climb to as high as 2.2 million tonnes. While incremental, he said he believes that rate of growth will be greater than for other base metals.

Ferreira noted that INSG is forecasting that primary nickel usage in EV batteries will increase by about 25% in 2022. This is consistent with the strong demand for EVs. Meir observed that while globally EVs only have about a 5-8% share of total light vehicles, by 2035-50 they could make up about 50% of the market.

But Sucden’s Wilkes said one big question is how many of their batteries are currently, and will continue to be, nickel-based – generally nickel-cobalt aluminium (NCA) or nickel cobalt-manganese (NCM) batteries – given that there are many factors that could influence the type of batteries that are likely to be used in EVs.

If nickel prices remain high, and if the Class 1 nickel supply remains very tight, Wilkes said it is possible that automakers will be motivated to use other promising battery technologies.

Another headwind, Bhar noted, is that some companies are looking to engineer out the cobalt that they use in the batteries for environmental, social and governance (ESG) reasons. Because of all these potential issues, he said that it is possible that nickel-based batteries will only be used in high-end, luxury EVs, or in those that will likely be driven longer distances and therefore require the longer range between charges that nickel-cobalt batteries have to offer over other types of battery.

Meanwhile, lower-end, more basic EVs used for shorter journeys could use lithium-ion phosphate batteries, which do not contain nickel.

It is nevertheless possible that the shortage of Class 1 nickel will actually not be a long-term issue.

“If the high-pressure acid leaching (HPAL) technology, which could convert Class 2 nickel to Class 1 nickel, is able to be applied on a large scale without massive ESG issues, there would be enough nickel available for EV batteries, at least for the next seven to eight years,” Georges said. “But if not, that could be a problem given that there are no new sizable nickel sulphate mines currently under development.”

He noted that while there is adequate supply of Class 2 nickel, the big question is Class 1 nickel supply, explaining that, given the projected growth of EVs, there is a need to increase Class 1 nickel supply by about 1 million tonnes per year by 2030, “And with the projects to do so currently being few and far between, and it is unlikely that they will generate more than 25,000-100,000 tonnes more Class 1 nickel [per year] over the next four to five years.”

As has traditionally been the case, stainless steel, which tends to use Class 2 product, continues to be the largest consumer of nickel, Eglinton observed. That is still true with the astronomical growth from the battery sector. She noted, however, that the stainless share – which is now about 70% of total nickel use – is not quite as large as it was previously.

Ferreira said that Chinese production of stainless steel this year has decreased, although its production of 300-series high-nickel-content stainless steel has remained fairly stable. Wilkes wonders whether the high nickel prices coming at the same time as consumer sentiment has been declining, and end-product price inflation is rising, could either cause further stainless steel demand destruction or a shift in the use of low-nickel containing 200-series stainless to a nickel-free 400-series product.

Georges said that he expects average global stainless steel demand to grow by about 3-6% this year, with the greater growth being in China and elsewhere in Asia due to the growth of the middle-class in that region. That, he said, is even though the Chinese economy is facing near-term pressure given the Covid-related lockdowns there.

Future nickel supply

The nickel supply story is largely centered on Indonesia. Bhar said that while some projects will continue to be developed elsewhere in the world, including in Canada, Australia and Europe, about 90% of new nickel supply is likely to come from Indonesia.

This comes as preliminary INSG data indicated that year-to-date through February global primary nickel production was up 13% year-on-year, helped by the strong increase in nickel pig iron (NPI) production in Indonesia.

Fastmarkets forecasts that Indonesian NPI production will increase by 25.7% this year to 1.124 million tonnes of nickel, which Cole believes will result in the exportable surplus nickel in NPI to increase 38% to about 705,000 tonnes, most of which will go to China to feed its stainless steel production. He also pointed out, however, that Indonesia’s growth profile is not just for NPI anymore, but also for the production of nickel in forms that can be used by the battery industry.

Ferreira noted that this includes such intermediate products as nickel matte and mixed hydroxide precipitate (MHP) that are being produced, or will be produced, from Class 2 nickel at HPAL plants. He said that much of those intermediate products are then exported to China to be further processed into nickel sulphate.

Georges said that, at least at this point, there are still some problems with HPAL technology, including that it is expensive to install and has environmental impacts to control, including the generation of slurry waste and carbon dioxide emissions.

“While it is possible that they will be able to reduce the technology’s implementation cost, it is still unclear if they are also able to address its environmental impacts,” he said.

Cole said that nickel matte and MHP production is expected to increase by about 470% to around 240,000 tonnes this year. He said that not only are PT Halmahera Persada Lygend (HPL), PT Youshan and PT Huayue ramping up the new plants they started last year, but China’s Tsingshan has begun converting NPI to matte and the first production from PT QMB and PT Huake are expected this year.

Additional HPAL projects are expected. For example, in late April Vale announced an agreement between PT Vale Indonesia Tbk and China’s Zhejiang Huayou Cobalt to develop a 120,000-tonne-per-year facility in Indonesia.

Overall, Meir described 2022 as a watershed year for nickel with an explosion in prices that surpassed anything that it had ever seen before. But even with inventories – both on the LME and the Shanghai Futures Exchange – as low as they are, he expressed confidence that while there could be some measure of volatility there will not be the same boom/bust scenario that was seen in the first quarter: “There should be much calmer conditions over the rest of the year with traders being more cautious and the LME imposing price limits to stop such wild swings.”

Also, according to Eglinton, with nickel prices as high as they are – albeit somewhat down from the recent peak – that could generate more interest in companies investing in additional supply, although it will take some time for that to come online and to impact the market.

Shorter-term there is a lot of uncertainty about what the future will bring.

“The market hasn’t been reacting rationally this year,” Wilkes maintained. “Although fundamentally it remains strong, there is a need for confidence to return before the nickel market goes back to trading like a normal market.”

To read more about the metals market, including coverage of critical battery raw materials, get the latest copy of the Metal Market Magazine May 2022.

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