Navigating the Complex Nickel Market - Expert Insights on Fundamentals, Prices, and Investment Risks

Introduction

Mark Selby, CEO of Canada Nickel Company, recently provided extensive commentary on the nickel market after attending the International Nickel Study Group (INSG) meetings in Lisbon. Selby has over 20 years of experience in the nickel industry. His insights covered key topics like demand and supply forecasts, price trends, project updates from major developers, investment risks, and the importance of jurisdiction and technology selection.

Robust Demand Growth Expected

According to Selby, the INSG predicts nickel demand will grow 8-10% in 2024. This matches the approximate 9-10% average annual growth rate seen in the first three years of this decade. Selby believes most analysts are still underestimating future nickel demand growth, especially from electric vehicle (EV) adoption. Major EV markets like the United States are still in the early stages of adoption. If 9-10% annual growth persists for another 6-7 years, Selby thinks global nickel demand could surpass 6 million tonnes per year, exceeding his previous forecast of 5 million tonnes.

The INSG's demand estimates provide evidence that nickel demand remains strong despite economic headwinds. With China's economy faltering and most other major economies in recession, nickel demand still grew around 9% in 2023. If some macroeconomic factors improve in 2023-2024, Selby suggests we could see 12-15% nickel demand growth in the coming year, setting the stage for higher prices.

Opaque Supply Situation

While the INSG has projected significant nickel oversupplies, Selby notes many market participants are questioning where exactly these surpluses are located. Reported surpluses have not caused the declines in nickel prices and class 1 nickel premiums that would be expected with excess supply.

Selby believes global nickel surpluses are smaller than widely estimated. New mines and refineries require extra feedstock and inventory during their ramp-up phase before reaching steady-state production. Nickel pig iron production in Indonesia and China would normally absorb any excess supply, but their prices are not falling currently.

Additionally, the complex battery supply chain necessitates substantial pipeline inventory. With multiple steps from mining to cathode materials, extra working inventory gets built up. Selby estimates there may be 100,000-150,000 tonnes of "hidden" inventory already embedded in new upstream processing capacity. This inventory absorption could explain why real-world prices contradict theoretical surpluses.

Price Trends

Recently, nickel prices on the London Metal Exchange dropped swiftly from around $22,000/tonne to $18,500/tonne on broad market fears. Selby expects prices to fall further to around $17,500/tonne before recovering by year-end or early 2024. This additional dip will let bears exit positions and sideline bulls temporarily before demand reasserts.

In China, discounts for nickel pig iron and sulfates versus the LME price have narrowed significantly amid the selloff. This squeeze indicates China's willingness to buy nickel despite lower prices. After muted trading in October due to holidays, conditions seem ripe for a price recovery soon based on supply and demand fundamentals.

Company News

Canada Nickel Advancing Innovative Carbon Capture

Canada Nickel recently announced positive results from a pilot plant testing in-situ carbonation of tailings from its Crawford nickel project. This successful test will allow the incorporation of a carbon credit model into Crawford's upcoming feasibility study. Consultants estimated each tonne of carbon captured could be worth $25 in credits. Combined with Canadian tax incentives, this provides a potentially substantial value boost to the project's economics. The feasibility study results will be released on October 12th.

Canada Nickel's novel tailings carbonation method offers a new way for miners to generate carbon credits. The company was able to develop and test this technique in just 14 months. The speed of this innovation demonstrates how nimble juniors can implement sustainable mining techniques rapidly.

Challenges at Horizonte Minerals

Junior developer Horizonte Minerals saw its shares plunge around 60% after delaying its Araguaia nickel project in Brazil by 6 months. Horizonte also indicated capital costs for Araguaia could rise 30% from previous guidance.

Selby feels the severe stock selloff was overdone. Araguaia possesses advantages like low-carbon hydropower that make it an attractive long-term nickel supply asset. However, it appears Horizonte is facing water management issues identified late in construction. Hopefully these engineering challenges can be resolved before production starts.

Additional delays or cost overruns could further damage investor confidence though. Horizonte will need to provide more transparency around the problems and have a clear plan to address them. The next few months will be crucial to restoring faith in Araguaia's viability pre-production.

Glencore's Troubled Koniambo Project

Glencore has struggled for years to ramp up nickel production at its technologically challenging Koniambo project in New Caledonia. Glencore has invested over $10 billion in Koniambo so far but the asset has never come close to reaching design capacity. Now Glencore has threatened to cease further funding if key issues cannot be renegotiated.

Koniambo's troubles, along with the nearby failed Goro nickel project, demonstrate that grade alone does not guarantee success in nickel mining. Other critical factors like jurisdiction, workforce, plant design, and flow sheet optimization are equally important. Between Koniambo and Goro, these debacles have destroyed nearly $20 billion in value.

For investors, failed megaprojects like Koniambo highlight the importance of proven technologies, experienced builders, and socio-political stability. Jurisdictions with established mining cultures tend to offer major advantages over technically "perfect" projects in challenging locations.

Cautious Stance on Unproven Hydrometal Processes

Recently, Atlas Materials raised $27 million to fund an unproven hydrometal nickel refining process. Selby remains skeptical of new hydrometallurgical approaches often touted as more sustainable alternatives. Most have failed the leap to commercial-scale production despite success in labs.

Selby feels established pyrometallurgical processes can match or exceed the emissions reductions claimed by hydromet if deployed with proper environmental controls. Nonetheless, Atlas Materials' fundraising shows investor appetite for sustainability-marketed technologies, even if unproven.

For investors, flashy buzzwords like "zero waste" should not override due diligence on technical viability. Serious questions remain about residue disposal, material reactivity, and other issues with hydrometals. New processes can take many years to optimize at commercial scale. Investors should focus sustainability investments on technologies with operational track records.

Conclusion

With demand still growing quickly and supplies remaining tight, nickel prices could rebound swiftly if projected surpluses fail to emerge. Juniors using proven, de-risked technologies in mining-friendly jurisdictions with stable workforces represent promising nickel investment opportunities. However, investors should look beyond hype and carefully examine new technologies marketed as eco-friendly alternatives before committing capital.