(The opinions expressed here are those of the author, Andy Home, a columnist for Reuters.)
Nickel has endured its worst week in almost ten years, with the London Metal Exchange (LME) price collapsing by 16% in the space of two days to a three-month low of $15,830 per tonne.
The trigger for the ferocious sell-off was an announcement by China’s Tsingshan Holding Group that it had signed deals to deliver nickel matte to two Chinese battery materials suppliers.
Tsingshan has rapidly emerged as one of the world’s largest nickel producers, its Indonesian mines pumping nickel pig iron (NPI) into a local stainless steel plant the company brought online in 2017.
It is a self-proclaimed disruptor of the stainless steel market and it’s now disrupting nickel’s bullish electric vehicle narrative.
The conversion of NPI to matte for processing into battery-grade nickel sulphate is another twist of nickel’s alchemical Rubik’s Cube and one which, according to Citi, “could rock the long-term investment case for nickel”.
The news was certainly enough to rock the nickel market this week.
Nickel’s growing usage in lithium-ion batteries and the accelerated roll-out of electric vehicles (EV) are not in doubt.
The case for higher prices, however, rests on the assumption that only certain types of nickel can be processed into battery precursor materials.
Indonesia is now both the world’s largest nickel producer and the fastest-growing one, with national mine output surging another 41% last year to 853,000 tonnes, according to the International Nickel Study Group.
Until now, however, all this nickel has been converted to NPI for the stainless steel sector.
Several Indonesian players are currently trialling the conversion of nickel ore to battery-grade material using high-pressure-acid-leach processing, a technology that is notoriously difficult to master.
Tsingshan is now opening up another bridge between ferrous and battery grades of nickel by going down the matte route.
“There is not a chemical reason why this cannot work but we note that it has not been done before,” said Goldman Sachs.
And it comes with some serious drawbacks that may limit its potential impact on global battery supply chains.
Leaving aside the question of whether Tsingshan can actually deliver on its promise to supply 100,000 tonnes of matte within a year from October, the matte conversion route requires an alignment of NPI, matte and sulphate premiums to be consistently profitable.
It also comes with a heavy carbon footprint, which is two to four times higher than using high-pressure-acid-leach technology, according to Goldman Sachs.
Given that this is material for powering “green” electric vehicles, a high-carbon processing route is unlikely to win over the likes of Tesla.
Goldman’s view is that “China will likely be the only destination market for this nickel which (…) is a very important limitation on the impact from Tsingshan’s strategy on the broader EV market.”
The investment bank projects nickel demand from EV batteries to grow by 400,000 tonnes between 2020 and 2025 with the Chinese market accounting for 70,000 tonnes.
Goldman’s conclusion is that Tsingshan’s disruptive processing path will not be enough to affect supply deficits for battery-grade metal. The bank is holding its 12-month price forecast at $21,000 per tonne.
Citi analysts are more cautious.
If Tsingshan can supply even part of China’s battery demand, it “could loosen nickel balances over the next few years” and push back the need for higher prices to incentivise new battery-grade projects. (“Nickel Deep Dive”, March 2, 2021)
If the impact of Tsingshan’s disruptive technology on physical market balances is uncertain at this stage, so too is the effect on investor sentiment.
Nickel’s green credentials have drawn increasing amounts of speculative money into both the London and Shanghai markets.
Money managers are currently net long of the LME nickel contract to the tune of 34,581 contracts, close to December’s record high of 38,800 contracts. Players in the “other financial” category are also as net long as they’ve been since late 2019.
Citi describes positioning as “stretched” and has identified 110,000 tonnes of holdings in nickel exchange traded products, “which may or may not overlap with the circa 500,000-tonne net speculative LME position”.
The severity of this week’s price collapse underlines nickel’s sensitivity to changes in investor sentiment with nickel bulls now risking regular whip-sawing from both the stop-start EV roll-out story and the continuously evolving nickel raw materials puzzle.
Tsingshan’s proposed use of matte to connect ferrous and battery production streams comes with as many questions as answers.
But no-one doubts the company’s research and development credentials. It has led Indonesia’s downstream nickel charge from ore to pig iron to stainless steel. Its giant new Indonesian mill has already upended the regional stainless steel market and is has made no secret of its desire to do the same in nickel.
The chances are that even if its timeline looks highly ambitious, it will get there in the end.
It’s a warning to nickel bulls that the market’s current battery narrative is likely to become a lot more ambiguous in the years ahead as multiple processing routes to battery-grade nickel sulphate open up.
This supply-side complexity is mirrored by fluidity on the demand side as multiple battery configurations compete in the burgeoning EV market.
A new generation of lithium-iron-phosphate batteries, which don’t use nickel, is grabbing a growing share of the Chinese market. The technology has even got the Elon Musk nod of approval.
The Tesla boss tweeted on Feb 25 that “nickel is our biggest concern for scaling lithium-ion cell production. That’s why we are shifting standard range cars to an iron cathode. Plenty of iron (and lithium)!”
Well, there’s plenty of nickel around as well. It’s just that no-one’s been able to work out how profitably to convert ore to sulphate via matte.
Tsingshan clearly now thinks it can.