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Spotlight: What are nickel's key price drivers?

Apr 16, 2018 | 08:07 AM | London | Richard Barrett

Tags  nickel price drivers, market spotlight, Metal Market Magazine, nickel outlook, EVs, battery raw materials

The long-term outlook for nickel looks bright but has the market run too far ahead on optimistic expectations? Nickel market experts weighed in with their opinions.

One glance at a price chart for nickel prices on the London Metal Exchange over the past 15 months shows the reason for its star status within the base metals complex. A 40%-plus rise since the beginning of 2017 to a momentary peak of $14,150 per tonne for the LME's cash contract at the official close in mid-February 2018 shows the reason for its attractions – even if it had dropped back to $13,355 per tonne at the approach of mid-April.
Excitement about the metal's prospects in rechargeable batteries used in electric vehicles (EVs) has been one key factor in propelling the price of nickel higher. William Adams, Metal Bulletin Research's head of base metals and battery research, recalls that the growing use of nickel, cobalt and lithium in batteries made for EVs was the talk of last year’s LME Week in London.

But the nickel market has a tendency to run ahead of events, he cautioned, reminding that in 2014 – in anticipation of Indonesia’s ore export ban – large stockpiles of nickel ore were built up in advance by purchasers, which depressed prices. The nickel market only really picked up again when China’s economy rose and early signs of global economic growth came through in 2016.

While the EV story remains strong for the metal, the nickel market appears to be running ahead of expected demand now, Adams said, noting that there are also still worryingly high levels of nickel stocks available. Even so, the nickel market could attract very long-term investors who note that  - even though it is now elevated from its nadir - the present price of the metal is relatively low versus historical highs.

Jim Lennon, managing director of Red Door Research, also pointed out that while the nickel market has been bullish prices are not particularly high at present.

“If you look at the cost curve, unlike copper and zinc prices - which are well above the nominal costs of their production - nickel prices are lying at the top end of its curve, meaning that some mines are still uneconomical,” he said, also stressing the importance of mining costs.

Lennon noted that reported nickel stock levels are still pretty high at more than 370,000 tonnes, so the price still has some way to go to overcome that overhang as it is drawn down.

Nickel was in oversupply during 2011-15, reaching a low point in price at the end of that period. Since then, demand has outstripped production. The global market showed a deficit of 50,000 tonnes in 2016, which climbed to a range of 100,000-150,000 tonnes in 2017, he said, adding that another deficit is expected this year.

“The market is definitely moving in the right direction [to support the nickel price]. No one thinks there will be a surplus for the next five years,” according to Lennon. “Nickel is now in structural deficit in contrast with the structural surplus of earlier years.”

Tiered market
Adams pointed out that the past dynamics of the nickel market have created a two-tiered market. The first is for high-purity nickel delivered by the conventional route of nickel ore processing and refining. The second has grown from the increasing role of nickel pig iron (NPI) production, particularly in China.

From a low base of just 5,000 tonnes in 2005, NPI production increased to around 400,000-450,000 tonnes before Indonesia banned ore exports in 2014. The export ban was relaxed in 2017.

Nickel ore is shipped from mines in the Philippines and Indonesia to create cheaper nickel units in NPI. Ferro-nickel is another important source of supply.

As of now, the EV-battery market wants tier-one (class-one) material that is sourced from mined nickel sulfide ores. The high-quality nickel metal produced from this is used to make the nickel sulfate needed for batteries, Adams said.

“A potential future supply problem may arise from the fact that nickel prices are still too low to encourage investment in opening new nickel sulfide mines, while it is also currently uneconomic to process ferro-nickel or NPI to deliver nickel sulfate of the quality required for battery manufacture,” he added.

In mid-March, sources in the nickel trade told Metal Bulletin that the major nickel producers are eyeing the 2020s for when the metal really takes off on the back of heightened EV and battery demand.

Traders have also questioned whether there will be enough nickel to support that EV boom. Market participants told Yang that around $13,000 per tonne for nickel on the LME is not enough to attract more investment in nickel mines and production. Physical traders are expecting the market to be extremely tight in three years’ time, when battery demand is expected to really start kicking in due to the lack of supply entering the market. Such tightness could lead to industrial consumers seeking longer-term contracts – similar to moves by BMW looking to secure a 10-year supply of cobalt and lithium.

Nickel market participants are watching cobalt to see where nickel consumption will go, with some saying that there is not enough cobalt to meet demand - meaning that there could indeed be a further shift toward using more nickel in batteries instead.

Nickel for battery production mainly comes from big integrated producers, like Norilsk Nickel and SMM, Lennon said, noting that their nickel metal output is used to make nickel sulfate for batteries.

“Other sources include supply of nickel sulfate from platinum and copper refineries and intermediate nickel-cobalt hydroxides,” he said, adding that primary nickel units in the form of briquettes and powder are coming from big suppliers such as BHP, Vale and Glencore.
“In 2017 nickel briquettes were shipped to the LME and in 2018 this is being redirected directly to end-users for nickel sulfate production.”

Lennon also noted that NPI production in China could be an important factor for the nickel market this year. “The relaxation of ore export restrictions from Indonesia could see a flood of ore into China for NPI production there this year,” he said. “Exports of Indonesian ore totaled 4.9 million tonnes last year but that has [the] potential to leap to 20 million tonnes this year. Last year’s 400,000-tonne output of NPI in China could rise to 500,000 tonnes as a consequence. By some estimates that level is China’s maximum capacity for NPI production.” 

If China is faced with a potential surplus of nickel ore supply for its needs, it could choose the higher-average-grade ore offered by Indonesia over lower-grade ore supply from the Philippines, he added. NPI production is also growing in Indonesia itself.

“All this could create an oversupply of NPI to contrast with booming battery demand. Somewhere in between, the supply-demand balance will be struck. There could be a short-term correction in nickel prices but a lot of people may want to go long in any price dip so it could prove to be very short-lived,” Lennon said.

Stainless dominates
While the recent buzz about nickel use in batteries has captured the imagination of some nickel-market participants, the reality of today’s demand for the metal is the dominance of stainless steel. 

“When stainless steel does well, nickel does well,” Adams said. “Stainless steel users are restocking now in an economic upturn.”

Lennon noted that as of now stainless steel accounts for 70% of nickel demand, while batteries use just 5%. In total, global demand for nickel is growing at a healthy rate of 6-7% a year.

China has also seen booming stainless steel demand over the past two years and that it is still looking pretty good this year, he said.

One impact on China’s stainless market has been the Tsingshan stainless mill in Indonesia, according to Lennon, noting that the plant produces slab as well as hot- and cold-rolled 300-series stainless steel. It produced more than 500,000 tonnes of stainless steel in the first quarter of 2018 and has the capacity to produce 2 million tonnes per year – a significant single-digit percentage increase in a 48-million-tpy market for stainless steel.

“Stainless steel prices in China have fallen this year while chrome and nickel prices have risen, leading to falling profitability and pro
duction cuts,” he said. “The new Indonesian mill, which has China as a major export market, has increased competition with 300-series stainless mills inside China. Although demand for stainless steel in China remains robust, the market needs to grow further to absorb the additional supply.”

For the time being, excess stainless steel supplies are finding their way into warehouse storage – something that might create a short-term correction that ripples back up the supply chain if other mills start to cut production, Lennon warned.

Potential surge?
The expected EV-battery demand bodes well in the longer term  – even though some analysts believe it could still be another five years before that market really takes off, Adams said.

In the meantime, on the supply side reported stocks of nickel are at 360,000-380,000 tonnes and Indonesia’s relaxation of its ore export rules has reopened the door to exporting to China.

Chinese President Xi Jinping has strengthened his power in the country and is looking to rebalance its economy. Large infrastructure projects that have taken a long while to get started – including those that are part of China’s One Belt One Road initiative – are beginning now. China’s leadership is also encouraging an attitude that new apartments should be for people to live in rather than for the property investment, or speculation, seen in years past, according to Adams. If that gains traction, thousands of completely empty apartments that have already been built could stoke demand for stainless steel-containing consumer goods as owners or tenants move in and outfit their new homes.

At a global level, Europe is booming, the US economy is strong and Brazil is recovering – all macroeconomic developments that bode well for nickel consumption, Adams said.

Andy Cole, Metal Bulletin Research's senior base metal analyst, wonders whether consensus views on future nickel prices have been too tame, pointing out that now that nickel has a reason to rally it could really start running away.

“In doing so it could outpace the tame, flattish forecasts we’ve been used to using in recent years,” he said. “In other words, we could be braver with our nickel price forecasts now.”

Historically, nickel does not tend to do flat price trajectories: price moves are typically steeper and run further, faster. Cole said. “With the market having found a reason to be bullish at last and investors effectively endorsing the start of what could be a new ‘super-cycle’ driven by a major structural shift in demand, we think nickel prices will get back to their old ways of steeper moves.” 

Metal Bulletin Research's base case charts a path back to quarterly averages in the $14,000-18,000-per-tonne range from the second half of this year – a range seen for an extended period between late-2011 and early-2015, according to Cole.

“Our high-case scenario sees prices rushing back to that range sooner and heading on to quarterly averages in the $20,000s by the end of next year, targeting the [first-quarter] 2011 highs,” he added.

This article was first published in the April issue of the Metal Market Magazine.


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