Why Goldman thinks nickel is trading like a biotech start-up — opinion
Nickel has been the strongest performer among the base metals traded on the London Metal Exchange (LME) this year.
Trading currently at $12,450 per tonne, LME three-month nickel is up by more than 14% since the start of January. Zinc, which has put in the next best year-to-date performance, is up by only 5%.
Nickel is defying both the general macroeconomic concerns weighing on other industrial metals and signs its own internal dynamics are weakening.
Nickel bulls are undeterred, keeping faith with the metal’s future prospects as a key raw material in the coming electric vehicle (EV) revolution.
It is, according to researchers at Goldman Sachs, trading like a “hope stock” in equities sectors such as biotechnology or software, with investors comfortable paying a premium for future promise rather than realised and predictable returns.
The global refined nickel market registered a supply deficit of 27,000 tonnes in the first four months of 2019, according to the latest snapshot from the International Nickel Study Group (INSG).
The deficit in the same four months of 2018 was 59,000 tonnes and analysts’ broad consensus is that the supply gap will close over the second half of this year.
Stainless steel remains the current driver of nickel usage and China remains the key driver of stainless production with output in the rest of the world largely flat-lining this year.
However, with stainless inventories building and margins contracting, China is itself heading for a stainless steel slowdown in the months ahead.
Meanwhile, production of nickel pig iron (NPI), the preferred nickel input for stainless steel, has been booming.
Indonesia’s mines form the collective core of the world’s NPI production stream. The country’s output of mined nickel surged 71% to 606,000 tonnes last year and jumped another 30% to 235,000 tonnes in the first four months of 2019, according to the INSG.
Look no further to understand the 7.7% increase in global mined output in the January-April 2019 period.
Strong production and weakness in the biggest usage sector should spell trouble for any metal, particularly in the context of the continuing trade stand-off between China and the United States.
But there is something else in the nickel price and it’s been there off and on since late 2017, when the market first woke up to the potential demand boom offered by the EV revolution.
Nickel is a key input to lithium-ion batteries and one that will grow over time as battery makers use more of it in their cathode chemistry.
High-nickel cathodes such as the NCM 811 series, denoting eight parts nickel to one part cobalt and one part manganese, currently account for only 1% of the passenger EV market in terms of GWh deployed, according to Adamas Intelligence.
However, it is the chemistry showing the fastest rate of growth, up 251% year-on-year in April in the context of 69% overall growth for battery capacity in newly sold passenger vehicles.
With major battery producers such as Contemporary Amperex Technology Co (CATL) and Automotive Energy Supply Corp (AESC) committing to commercialize NCM 811 technology, “it’s apparent that more growth is around the corner,” Adamas notes.
How fast this will happen “remains a hot topic for debate”, to quote Adamas, but dreams of nickel’s electric future remain embedded in the nickel price.
Nickel’s “hope” premium, as it were, is being reinforced by physical stock building on the part of both the battery supply chain and speculators.
Since right now only refined nickel, rather than NPI, can be used as a battery input, this build has been most manifest in movements of LME stocks, which comprise higher-purity, so-called Class I nickel.
LME stocks fell by 160,000 tonnes last year, but Goldman notes that the previous LME stocks’ relationship with Chinese imports has broken down.
Chinese imports of refined nickel fell in both 2017 and 2018. Goldman argues that a significant part of what left the LME last year went to off-market build in Europe with the flow switching to the Middle East in the first quarter of this year.
“All signs suggest significant investment and hedging demand behind the sharp decline in LME nickel stocks over the past year or two,” according to the bank.
Evidently, falling visible inventory reinforces nickel’s bull narrative, creating something of a virtuous investment circle.
The downtrend in LME stocks has ground to a halt in the last month or so after time-spreads briefly flared out in May.
It’s worth noting that the largest single delivery of nickel on to LME warrant, 4,788 tonnes on June 4, came at Dubai, not an obvious location for industrial nickel users.
Nickel is increasingly a split-personality market, torn between its historical relationship with the stainless steel cycle and the future promise of the battery sector.
The former is still dominant, the latter still nebulous.
Not least because Chinese producers such as Tsingshan are planning to close the current materials gap by generating battery-grade nickel from the ore that currently feeds the NPI process.
“This makes pricing and forecasting nickel difficult”, according to Goldman Sachs, which is why the bank has borrowed from the “hope stocks” model to develop an option-value methodology rather than just come out with “one highly uncertain base case.” Goldman pegs nickel’s stainless-dependent price at around $10,000 per tonne, reflecting nickel pig iron break-even levels, and then layers in optionality to cover various scenarios around whether attempts to produce battery-grade material from ore are successful.
The end-result is a forecast for $13,600 per tonne, comprising $10,000 for old stainless steel drivers and a $3,600 premium for electric upside.
The forecast is of course itself a moving target since there are so many individual moving parts to the equation.
You may or may not agree with Goldman’s conclusions but the bank is right in highlighting nickel’s increasingly complex pricing mechanics.
(By Andy Home; Editing by Susan Fenton)