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Why I believe the collapse in Nickel prices is overdone

Avatar photo   By: Matt Fernley

Posted on - 05 Mar 2021

Over the past three days the LME nickel price has fallen c.14%. Nickel market commentators have cited issues such as CTA selling and issues over Norilsk Nickel’s production but, in my view, the primary catalyst was the announcement by Tsingshan that it will start producing nickel matte from low grade nickel laterite ore as a raw material for nickel sulphate in the manufacture of EV batteries.

I believe that nickel’s status as a key material for next generation electric vehicle batteries and the secular demand pull of that event has been the major reason why nickel prices have outperformed much of the rest of the base metal complex over the past 12 months. Given the concerns about the ability of the nickel industry to add supply, most commentators (including me) had been calling for a substantial supply/demand gap to emerge over the next few years.

We suggested that a gap was likely to emerge because very few world-class nickel projects have been found and/or built in recent years. While various Chinese companies are looking to develop low-grade nickel laterite projects using High Pressure Acid Leach (HPAL) technology in Indonesia, there is a concern in the market about, not only the environmental sustainability of these projects, but also whether the operators will be able to hit their expected production targets given the difficulty of starting up and then operating HPAL projects, and also whether this would in fact even be enough supply to offset the likely demand growth. A recent Indonesian ban on tailings disposal at sea is likely to have further complicated the development pathways of these projects.

But the announcement by Tsingshan appears, on the surface, to have burst that bubble. Certainly the market seems to think so. Tsingshan reportedly said in a statement on its WeChat account on Wednesday that it had agreed to provide 60Kt of nickel matte to Huayou and 40Kt to CNGR Advanced within a year, starting in October 2021. The aim would then be for these companies to further process the nickel matte into battery grade nickel sulphate, a key precursor for NCM batteries.

This all sounds very exciting from the point of view of users of nickel (less so from the point of view of producers) because it would provide a brand new stream of nickel supply, potentially filling in the supply/demand gap and depressing the upside potential for longer term nickel prices.

BUT there are two major issues with that assumption, in my view:

  1. The question of whether the matte is a viable precursor for battery grade nickel sulphate. The real issue is likely to be the amounts of impurities in the product which are deleterious to battery manufacture. Battery grade nickel sulphate is a very pure product and impurities likely need to be less than 300ppm, and they also need to be less than that level consistently. The question is likely to be whether material derived from this process can be consistently and economically upgraded to material of sufficient purity for use in batteries. The jury is still out on that.
  2. This is not a clean process. The process of producing nickel matte is a high-temperature, power-intensive process. 88% of Indonesia’s power comes from hydrocarbon sources. In addition to that there is significant solid waste which must be disposed of (and preferably not into the sea!). And then, in addition to that, the sulphidation process can produce a lot of SO2 which must be captured.

So, if we assume for now that the process can be successful, the key issue is its take up by the auto industry. As a battery materials specialist I find myself writing more and more on the issue of sustainability, particularly with regards to supply of raw materials. Given recent moves by Western World automakers to lower their dependence on cobalt and focus on lowering GHG emissions within their supply chains, I think it’s highly likely that material derived from this process wouldn’t be acceptable to Western World OEMs. As such, it likely will only be Chinese OEMs, which aren’t as focused on sustainability, that would be prepared to accept material manufactured using this process.

So, the thinking goes, this supply can then fill in the supply/demand gap by displacing high quality nickel from other sources.

BUT, how much material will that actually displace?

In 2020 China accounted for 40% of global EV sales and c.30% of global light vehicle sales. In my battery materials supply/demand model, I forecast that nickel containing batteries will be 76-80% of the global market for EVs during 2020-30E. It’s probably going to be less than that in the Chinese market, given the prevalence of the LFP battery chemistry, which can account for up to 50% of Chinese EV battery installations.

Below is a chart showing my nickel demand forecasts for EV batteries from 2020 to 2030E. I’m forecasting nickel demand for batteries to increase by an incremental 450Ktpa by 2025E and 1.3Mtpa by 2030E. That’s a lot of nickel.

But how much of that will actually be displaced by this new technology, assuming its only used for Chinese EVs? Well, if my assumptions above are correct, it’s less than 100Ktpa by 2025E and 300Ktpa by 2030E. That still leaves nickel producers to find another 400Ktpa of incremental nickel supply by 2025E and 1.1Mtpa by 2030E. That’s an awful lot of nickel and a lot more than accounted for by the Indonesian HPAL developments.

My conclusion: The market sell-off is overdone. We still need a huge amount of nickel supply additions by traditional means for EVs, and we will still be struggling to develop and build sufficient nickel mining capacity in the near-term.

I’m grateful for views shared by Jacques Eksteen and Saikat Sengupta which helped with the formulation of my opinions for this article.


Batteries China ESS EVs Indonesia Investing Mining Nickel Tsingshan