We estimate that the refined nickel balance was in a large deficit in calendar 2021, with a steep associated rundown in visible stocks. This flipped to an aggregate surplus of material size in calendar 2022. At the midpoint of calendar 2023, we estimate that we are in the middle of a three–year run of surpluses that are likely to average out well over 200 kt. The point at which this manifests itself fully in LME pricing has not been reached yet, notwithstanding the substantial unwinding of calendar 2022 fly–up pricing levels that has occurred over the last six months. The Class–I sub–balance has remained tight, keeping exchange stocks at very low levels. Visible stocks are down by –44% YoY.
The excess has been contained, to date, within the significantly larger Class–II product set, and the rapidly growing intermediates space, where the surplus has burgeoned. The excess of nickel units outside of Class–I has been most evident in the Asian theatre for some time, and payables versus LME equivalents have plunged accordingly.29 We consider that there have been three major dynamics at play here. The first is that demand for stainless steel (70% of nickel first–use in calendar 2021, but only 65% in calendar 2022) has slowed.
Second, there have been three consecutive years of double–digit growth in Class–II production from 2020–2022 (with net growth in Chinese and Indonesian nickel–pig–iron [NPI] up around 1.6 times versus 2019), which will be followed up by something in the high–single digits in calendar 2023 (with the net China–Indonesian NPI uplift moving to around 1.8 times 2019 levels). The third has been stunning growth in intermediates from Indonesia: NPI–to–matte production (~75% nickel contained) increased from 2 kt in calendar 2021 to 124 kt in 2022, and is on track for something in the mid 130 kt area in calendar 2023; while mixed–hydroxide precipitate (MHP: 30–45% nickel contained) rose from 16 kt in 2021 to 113 kt in 2022, with calendar 2023 projected in the mid 140 kt area.30
The surge in intermediates supply is the direct result of upstream innovation to meet the needs of the rapidly expanding battery value chain. But breakneck growth and profitability are not always the same thing. The move to bring more supply into the battery value chain has, to date, not been a particularly profitable exercise, with insufficient capacity on the Chinese Mainland to process discontinuous growth of an essentially new product. It has also seen a collapse in the economics of the metal dissolution route to nickel sulphate in China. Separately, NPI margins have also come under considerable pressure, but the existing glut of intermediates make the NPI–to–matte escape route unrewarding to pursue. The elegant solution to these circular problems (from the perspective of a Class-II producer, something we are obviously speculating on) was, of course, to find a way to economically convert some of the glut of intermediates into refined metal suitable for delivery to the major exchanges: thereby easing the opposing pressures in each product class, accessing the considerable arbitrage presently on offer, and enjoying the optionality of exchange deliverability. Accordingly, we have seen 50–60kt of new Class–I capacity come online in China as of June 2023, with double that expected to be operational across China and Indonesia by December 2023. Chinese industrial giant Huayou Cobalt has been approved for deliverable status on both the SHFE and the LME, with others expected to follow.
Huayou was the first company to apply for brand listing under the LME’s new “fast track” approvals process. Diversifying sources of deliverable metal to the LME exchange is a sensible in-principle step in the reform of this institution, as is the return of Asian trading hours and their consideration of making nickel powder LME deliverable. However, this new Class-I capacity begs some important questions for the nickel industry. The first are the potential consequences of the fact that the new Class-I supply is going to come in the form of cathodes. Cathodes are traditionally used in stainless steel and are not particularly suited to the rapidly growing lithium-ion battery sector. If cathodes do not prove to be fully fungible from the perspective of the battery value chain, then there is potential for a material bifurcation within the Class-I products space. The second question is that as the majority of feedstock behind the new product flow will come from Indonesia, where a well-known range of ESG and responsible sourcing challenges currently exist, how might that impact upon the attitudes of metal consumers that are not indifferent to these fundamental points?
While the LME will no doubt enforce its policy on “Responsible Sourcing of LME Brands” to any material applying to be listed, will it be sufficient to address the aforementioned challenges if/as this new subset of Class-I material becomes a growing share of LME inventories and/or turnover? The veracity of this price as a representative benchmark for the lithium-ion battery value chain may come into question. The battery value chain is a sophisticated and demanding group of consumers that require high ESG standards and supply chain transparency as well as nickel feedstocks that are cost-effective to convert to nickel sulphate.
We argue that the LME and other organisations could look to grasp the opportunity created by the potential flurry of new listings, to either increase the transparency for buyers of metal as to the heterogeneous GHG emissions intensity and other relevant ESG characteristics that are deemed valuable by discerning purchasers, or explore options to develop nickel pricing that can explicitly incorporate such characteristics as premia and discounts to the base price (e.g. GHG intensity, adherence to agreed mining and refining standards, such as tailings management). We also note in this regard that entrepreneurial interest in alternative nickel pricing solutions has emerged, such as GCH’s spot trading platform for the physical delivery of Class-I nickel, and Abaxx’s development efforts towards a nickel sulphate price. BHP is monitoring all these developments and we are engaging constructively with the broader ecosystem to build a more transparent, efficient and robustly independent pricing mechanism for this critical mineral – in its many traded forms.
Turning to the longer term, we believe that nickel will be a substantial beneficiary of the global electrification mega–trend and that nickel sulphides will be particularly attractive. This is due to their relatively lower cost of production of battery–suitable class–1 nickel than for laterites, as well as the favourable position of integrated sulphide operations on the GHG emissions intensity curve.
There are five key questions for the nickel market in the longer run.31 The first is how fast will electric vehicles (EVs) penetrate the auto fleet? The second is what mix of battery chemistries will power those vehicles? The third is what will be the “steady state” marginal cost of converting the abundant global endowment of laterite ores to nickel products suitable for use in battery manufacturing? The fourth question is related to the third: how will the cost curve evolve in the face of ever–increasing consumer and regulatory demands for transparency with respect to the sustainability performance of upstream activity, including the transition to pervasive carbon pricing? The fifth is how will the trade flow of nickel units be influenced by policy and geopolitics?
Our views on the first two questions are both well–known and uncontroversial: EVs are taking off, and ternary nickel–rich chemistries are expected to be the leading technology that powers them. Leading of course does not mean that this technology will monopolise all applications, and we have previously reported that we revised the long–run share of nickel–rich batteries lower in recent analyses. LFP (Lithium–iron–phosphate) has made considerable inroads in recent times, particularly in China, where affordability concerns are paramount among EV buyers and range anxiety is somewhat less pronounced than in the West. Our view is that LFP will continue to play an important role at the low–and–medium end of the cost and performance spectrum, especially in the developing world. Other chemistries (for example those that thrift on cobalt and/or accommodate more manganese) are also likely to find their niche as EV penetration broadens to all vehicle categories.
Some of the longer–term market share that we had previously allocated to “unspecified future technologies” has now been captured by incumbent chemistry families, partly due to projectable signposts on cathode pairings with solid–state electrolytes. We have also seen an increasing focus on the anode as a battery performance lever. We’ve chosen to bring forward the likely timing of the commercialisation of solid–state batteries, the first–generation of which (featuring semi–solid electrolytes, sometimes referred to as “condensed matter”) seem likely to be paired with high nickel cathodes within just a few years. Beyond that, indications are that solid–state batteries, which are expected to represent a leap in safety and performance, can be deployed with a range of anode and cathode technologies and can thus serve as a default electrolyte platform. Sodium–ion batteries have also been garnering additional interest. They could play a long–term role in stationary storage, with possible application in some segments of the two–wheeler space, three–wheelers, and no–frills passenger vehicles.
On the third and fourth questions, the frenetic pace of capacity additions in Indonesia offers multiple data points. We have observed that capital–intensity estimates from Sino–invested projects in Indonesia are consistently lower than those with Western sponsors, or consultant estimates of likely capital intensity. Evidence to date implies that the reality is sitting somewhere between the developer–advertised cost and the more sober views of the analytical community. Notably, ramp–ups have also been far smoother than the bumpy ride experienced by the first generation of HPAL projects attempted globally in the early 2010s, where official nameplate capacity proved chimerical in some instances. We have also observed that some projects that are adopting gas–fired power from the outset, rather than the typical coal, are inevitably coming in at a higher capex cost. On the operational side, an increasing recognition among nickel customers and the wider investor community of the broad environmental impact of Indonesian operations (for example land–use change, biodiversity, and tailings management)32 , in addition to the highly carbon emissions intensive nature of the local (frequently captive) electricity supply, should – rightly – add to the cost base of supply from this region in due course. We range the quantum of this cost uplift in our long run scenario analysis. Western media scrutiny of ESG issues in Indonesia has arguably intensified over the last six months, amidst heightened interest in the provenance of critical mineral and decarbonisation technology in general.
The question of how carbon pricing at home (i.e., direct mine costs embedded in a traditional supply stack) and at the border (i.e., delivered cost to a user in a region enforcing a carbon border adjustment mechanism – a CBAM) will influence medium– and long–term competitiveness remains wide open. While market forces will have much to say about this matter, policy and politics will also matter a great deal. Which leads into the fifth point well.
Calendar 2022 may well be memorialised by future historians of the energy transition as the year that the US passed the Inflation Reduction Act (IRA).
The over–arching design of the IRA neatly encapsulates the intersecting themes of the decarbonisation imperative, the desire for energy security, supply chain resilience, economic nationalism, and great power rivalry.
The practical import of the legislation for nickel and other battery raw materials is that there are significant inducements for automotive OEMs to dramatically reconstitute the geographic make–up of their critical mineral supply chains in favour of domestic activity. Or failing that, partnering with FTA aligned nations, those given equivalent status under a formal exemption (e.g. Japan and the UK) or perhaps those brought in under other banners such as the Indo–Pacific Economic Framework (IPEF). The IPEF captures a number of countries of interest in the EV and broader technology supply chain, including Australia, Japan, India, Singapore, Malaysia, South Korea, the Philippines, Vietnam and, of course, Indonesia. The IPEF reported that a landmark supply–chain agreement was close to being finalised in May–2023, after a session suitably hosted by the city of Detroit, with a sector specific Supply Chain Council and a Supply China Crisis Network among the outcomes. Whether IPEF becomes a quasi–FTA from the perspective of the IRA remains speculative. Roughly a year after President Biden signed the IRA into law, there also remains ambiguity around the interpretation of the “Foreign Entity of Concern” provision, and by extension, whether Indonesian nickel produced or part–owned by Chinese companies will eventually find its way into the US as a qualifying material for IRA subsidies.
Europe’s Critical Raw Materials Act was launched in March 2023, establishing targets for the EU’s contribution to its own consumption at the extraction (10%) and processing (40%) stages for the materials on its list, adding a recycling objective (15% of consumption – noting that the earlier waste management framework directly limits the export of scrap to the developing world) and a supplier concentration ceiling (no more than 65% from any single third country). A voluntary central buying entity remains part of the framework – which is not something that has historically produced efficient outcomes for either producers or consumers. Japan’s refreshed strategy includes a provision where the venerable JOGMEC (styled as “Japan’s organisation for energy and metals security”, whose roots go back to the 1960s) will extend its activities to financial support for metals processing investment, with smelting specifically called out. That could well create a match for resource–rich, processing–poor jurisdictions with ambitions to move further downstream.
Australia’s Critical Minerals Strategy has also been refreshed. As a major exporter of a diversified basket of commodities, some of which are leveraged principally to traditional fundamentals, and some of which will furnish the essential building blocks of the energy transition, Australia’s starting point and perspective is very different to that of the northern hemisphere manufacturing powerhouses. Our consistent advice on this matter has been that Australia can productively focus on creating the most internationally competitive business environment possible, and much can follow on from that. That requires an emphasis on economy-wide productivity enhancing policies, including getting the balance right in industrial relations, having a competitive and predictable taxation and regulatory system, pursuing a world-class energy and logistics infrastructure base, tackling our current skill shortages and pre-empting what the next wave of skills demand will look like, and systematically seeking to attract the best individual talent and most innovative companies that the world has to offer. For mining specifically, speeding up approval processes would be a major contribution to collective efforts to mobilise the metals and materials that the world needs for both traditional purposes and to decarbonise.
In terms of Australia’s critical minerals list itself, which is currently under review, copper, nickel and uranium are, in our opinion, natural additions due to their integral role in the energy transition and their inclusion in the lists of many other producing and consuming regions, including the nation that is arguably most like Australia in this context - Canada.
World Bank analysis
33 of ten low-carbon energy technologies that are expected to drive the broader growth in critical minerals demand, shows that copper is essential to all ten technologies and nickel to nine of them. Uranium is central to the production of zero-carbon nuclear electricity, and nuclear power features quite prominently in the majority of 1.5 degree scenario analyses we have studied. It would also be likely to satisfy any geostrategic screening criterion that is applied.