Nickel may need time to recharge its batteries

This tightness in the battery nickel market doesn’t reflect the broader market fundamentals. Exchange inventories are not reflective of a growing surplus of nickel feed for stainless steel. ANZ estimates an over-supplied market of 55,000 tonnes in 2023. 

“ANZ estimates an over-supplied market of 55,000 tonnes in 2023. If EV sales growth disappoints, we could see downward pressure on nickel prices this year.”

This tightness in the battery nickel market doesn’t reflect the broader market fundamentals. Exchange inventories are not reflective of a growing surplus of nickel feed for stainless steel. ANZ estimates an over-supplied market of 55,000 tonnes in 2023.

If EV sales growth disappoints, we could see downward pressure on nickel prices this year.

Strong growth from EV sector not enough to offset rising nickel supply

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Nickel started the year strongly as optimism about stronger demand grew after China’s COVid reopening. However, low liquidity on the London Metal Exchange (LME) has kept prices volatile. Trading volumes on the LME fell after the exchange suspended trading in March 2022. Government policies and geopolitical issues have also fuelled the rally in prices.

Inventories fell from 100,000 tonnes in 2022 to about 50,000 tonnes by the end of December. Much of this tightness has been caused by strong demand for battery-grade nickel, known as Class 1 nickel, over the past year. High gasoline prices and an acceleration in energy transitions have spurred strong demand for EVs.

Changes in trade regulations by Indonesia, including additional export taxes on nickel pig iron (NPI) and nickel matte, have had a major impact on trade flows and prices. This led to a wave of investment and the creation of a downstream processing industry, as well as prompting other countries to consider similar policies.

Indonesia’s nickel production

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The Philippines is mulling an export tax up to 10 per cent on nickel ore. Following Indonesia’s nickel ore export ban, the Philippines has been a major source of feed for Chinese NPI plants. It contributed nearly 85 per cent of all nickel ore imports into China in 2022. If the export tax is implemented in the Philippines it could curb China’s NPI production.

The Russia-Ukraine conflict has also raised the prospect of further supply disruptions. Although Russia’s nickel industry has escaped the large-scale sanctions imposed on its oil exports, it has still been beset by disruptions as western countries cut business relationships with Russia. These issues could provide some short-term upside risks to ANZ’s view.

Nickel output to quench demand

Indonesia has seen a strong increase in investments in nickel production. Domestic production is dominated by laterite ore, a low-grade ore traditionally used to create Ferronickel (FeNi) or NPI – products used to produce stainless steel.

But attracted by surging demand from the EV battery sector, China’s stainless steel and nickel giant Tsingshan Holding Group developed a process to convert laterite ore into an intermediate product known as nickel matte. This can then be further refined into nickel sulphate for use in lithium-ion batteries.

Indonesia also plans to develop downstream sectors. High Pressure Acid Leach (HPAL), a process used to extract nickel and cobalt from laterite ore, is used to increase the supply of battery-grade nickel. That means Indonesia’s nickel production growth mix will continue to change and ANZ sees supply of feed for Class 1 nickel products from Indonesia increasing 12 per cent this year.

Canada is another country with promising prospects for so-called ‘green’ nickel production. Tesla and other major EV producers are signing contracts with Canadian smelting companies for nickel supply in anticipation of strong sales of EVs.

While getting a premium for nickel produced from renewable resources looks far-fetched, Canada is well-positioned to leverage its large reserves of nickel sulphide ore (less energy required) and renewable energy sources.

According to industry research agency AME’s estimates, Canada is set to produce nearly 167,000 tonnes of finished nickel by 2027, implying 3.7 per cent of average annual growth from 2022. Vale’s Sudbury and Long Harbour are two main projects that produce 43,000 tonnes of class 1 nickel each.

Australia is also ramping up nickel exports to reach 188,000 tonnes in 2024, from 157,000 tonnes in 2022. Investment in nickel mining and processing is likely to increase further amid attractive profit margins. Current nickel prices of ~US$29,000 a tonne are well above production costs.

Exchange inventories are not true indicator

The current structure of the nickel market makes true price discovery difficult. More than half of global supply cannot be delivered to exchange warehouses. As such, the inventories being held on such exchanges will not accurately reflect underlying fundamentals of the market.

LME nickel inventories fell from 250,000 tonne to below 50,000 tonnes last year. A similar decline was seen in SHFE stockpiles due to strong demand from EV manufacturers. Russian supply disruption was another factor, though the LME continued to accept metals sourced from the country.

Increasing production of Indonesian Class 1 nickel amid minimal disruptions from Russia should see inventories grow this year. A lack of liquidity in the nickel market has also been affecting the price discovery mechanism. A short squeeze in the nickel market in March 2022 saw prices briefly hit USD$100,000 a tonne and prompted the LME to halt trading and cancel trades for a day.

This has led many producers, consumers and traders to shun the market. With low liquidity, huge intra-day moves are becoming increasingly common. This made many question the LME’s role as an accurate indicator of supply and demand in the global nickel market.

ANZ expects a global nickel market surplus of 55,000 tonnes in 2023. However, there is some upside risk to the surplus considering the incentive for additional supply to enter the market remains high.

We have kept our demand forecast unchanged despite signs of slowing growth in EV sales. Even if supply tightness continues, we see nickel prices likely capped near US$30,000 a tonne. However, our base case scenario is prices will trend lower during 2023.

Daniel Hynes is Senior Commodity Strategist and Soni Kumari is Commodity Strategist at ANZ Institutional.