According to the company’s website news release on February 21, 2023, LME nickel prices ranged from $19,100/t to $30,425/t over the first half of financial year 2023, averaging $23,652/t. The average is –15% lower than the prior half. The shadow cast by developments that emerged in the prior half was long. The two principal factors here were the ongoing impact on LME market functioning in the wake of the epic short squeeze of March–2022, and the inflection point for demand expectations and investor sentiment that occurred in the June quarter. Due to the latter factor, sentiment was at a low ebb as financial year 2023 opened, but the first half closed with an air of something not unlike euphoria pervading. In between, an uneasy range trade developed, with LME traders looking warily over their shoulders, with the wafer–thin inventory position and low levels of liquidity being fertile ground for potential pricing discontinuities.
We estimate that the refined nickel balance was in a large deficit in calendar 2021, with a steep associated rundown in visible stocks. This flipped to an aggregate surplus approaching +300 kt in 2022. However, this did not manifest in LME pricing to any great extent, as the Class–I sub–balance remained tight, keeping exchange stocks at very low levels.
It was the significantly larger Class–II supply, and the rapidly growing intermediates space, where the surplus burgeoned. The excess of nickel units outside of Class–I showed up clearly in the Asian theatre, where payables versus LME equivalents plunged. There were three major dynamics at play here. The first was that demand for stainless steel (69% of nickel first–use in calendar 2021) slowed abruptly. Second, there was double–digit growth in Class–II production (with Indonesian nickel–pig–ironramping up an additional 31% YoY). The third was stunning growth in intermediates from Indonesia: NPI–to–matte production (~75% nickel contained) increased from 2 kt in calendar 2021 to 124 kt in 2022, while mixed–hydroxide precipitate (MHP: 30–45% nickel contained) rose from 16 kt in 2021 to 113 kt in 2022. This caught potential users of this material on the Chinese Mainland on the hop – there was not enough capacity in place to absorb this discontinuous growth.
The surge in intermediates supply is the direct result of upstream innovation to meet the needs of the rapidly expanding battery value chain. It is also highlighting that reform of the LME’s metal delivery rules is long overdue. The LME short squeeze episode highlighted vulnerabilities that had been building for years. In 2010, 57% of nickel production was eligible for LME delivery. That figure is now below 30% and on current supply projections, it will only fall further. Uncertainty over the long–term status of Russian Class–I metal should self–sanctioning increase (a segment in which Russia is the single largest producer), adds to the urgency to modernise the norms of the exchange.
For now, the reality is that the global price discovery mechanism for this critical building block of the energy transition is not functioning well. The basic tension is that the exchange where the benchmark price is set has become more removed from what is happening in the physical clearing market – China. An example of this is the collapse of metal dissolution economics in China in a world where Class–I supply is tight but intermediate feedstocks for nickel sulphate (NiSO4) are over–supplied.
Turning to the outlook for calendar 2023, we anticipate another surplus in the aggregate, but it is expected to narrow from the calendar 2022 level. Solid demand from stainless steel and another steep increase in EV battery requirements are anticipated. Together with the first single–digit increment in Class–II supply this decade (2020/21/22 were +10%/10%/12% respectively), that adds up to a surplus in the vicinity of 200 kt. The key uncertainties in the short–term are: the global growth outlook; the EV sales outlook; and the possibility of innovations in the Sino–Indonesian industrial eco–system that finds a way to economically convert excess non–Class–I over–supply into refined metal.
Turning to the longer term, we believe that nickel will be a substantial beneficiary of the global electrification mega–trend and that nickel sulphides will be particularly attractive. This is due to their relatively lower cost of production of battery–suitable class–1 nickel than for laterites, as well as the favourable position of integrated sulphide operations on the GHG emissions intensity curve.
There are five key questions for the nickel market in the longer run.18 The first is how fast will electric vehicles (EVs) penetrate the auto fleet? The second is what mix of battery chemistries will power those vehicles? The third is what will be the “steady state” marginal cost of converting the abundant global endowment of laterite ores to nickel products suitable for use in battery manufacturing? The fourth question is related to the third: how will the cost curve evolve in the face of ever–increasing consumer and regulatory demands for transparency with respect to the sustainability of upstream activity? The fifth is how will the trade flow of nickel units be influenced by policy and geopolitics?
Our views on the first two questions are both well–known and uncontroversial: EVs are taking off, and ternary nickel–rich chemistries are expected to be the leading technology that powers them. Leading of course does not mean that this technology will monopolise all applications, and we have previous reported that we revised the long–run share of nickel–rich batteries lower in our most recent range analysis. LFP (Lithium–iron–phosphate) has made considerable inroads in recent times, particularly in China, where affordability concerns are paramount among EV buyers and range anxiety is somewhat less pronounced than in the West. Our view is that LFP will continue to play an important role at the low end of the cost and performance spectrum, especially in the developing world. Other chemistries (for example those that thrift on cobalt and/or accommodate more manganese) are also likely to find their niche as EV penetration broadens across all vehicle categories.
There has been a lot of information flow on the third and fourth questions, with the frenetic pace of capacity additions in Indonesia offering multiple data points. We have observed that capital–intensity estimates from Sino–invested projects in Indonesia are consistently lower than those with Western sponsors, such as those of Eramet–BASF and Nickel Industries. On the cost side, an increasing recognition among nickel customers and the wider investor community of the broad environmental impact of Indonesian operations (for example land–use change, biodiversity, and tailings management)19, in addition to the highly carbon intensive nature of the local (frequently captive) electricity supply, should – rightly – add to the cost base of supply from this region in due course. We range the quantum of this cost uplift in our long run scenario analysis. Western media reports of violent worker protests in the wake of serious safety incidents at an Indonesian operation are likely to increase levels of ESG scrutiny.
On the fifth point, calendar 2022 will likely be memorialised as the year that the US passed the Inflation Reduction Act (IRA). The over–arching design of the IRA neatly encapsulates the intersecting themes of the decarbonisation imperative, the desire for energy security, supply chain resilience, economic nationalism, and great power rivalry. The practical import of the legislation for nickel and other battery raw materials is that there are significant inducements for automotive OEMs to dramatically reconstitute the geographic make–up of their critical mineral supply chains.
The principal carrot is that EV manufacturers will qualify for significant per vehicle subsidies if they meet the IRA’s heavily prescribed local content (by value) requirements – which for critical minerals start at 40% and then escalates +10 percentage points per year. What separates the IRA’s design from standard local content requirements is that it explicitly incorporates the concept of “friend–shoring” – whereby existing FTA partners qualify as providers of local content. Think Australian or Canadian nickel, or Australian and Chilean lithium. While the practical interpretation with respect to critical minerals value chains is not precisely clear at this stage, and whether there will be pragmatic concessions that (for instance) draw Indonesian origin nickel into the eligible mix will be important, we expect the direct, indirect and unintended consequences of the IRA will resonate for a considerable time to come.
