Nickel Price Rangebound But Strong Demand Growth in Q1/24

• Nickel prices bouncing around $17,500/tonne level due to news around Indonesian ore issues and inventory changes. Prices are expected to stay rangebound for a few more months.
• Convergence happening between nickel sulfate and NPI prices. NPI discounts to LME nickel compressing to around 78-80%.
• Indonesia flexing control over the nickel market through a new ore pricing mechanism expected to raise costs for NPI/MHP producers.
• Strong stainless steel and EV demand growth in China offsetting economic headwinds. Analysts underestimating nickel demand growth.
• Automakers urgently seeking to lock up nickel supply over the next decade. Looking for strategic investments and off-take from projects to enable ramp-up.

Nickel prices have stabilized around $17,500 per tonne in recent weeks, bouncing between small inventory changes and news around Indonesian ore export issues. Prices are expected to remain rangebound near these levels for another couple of months until destocking finishes on the battery side and noise around stainless steel demand in China dies down. However, several underlying trends point to strong nickel demand growth reasserting itself in 2024 and beyond.

“After we get through a bunch of destocking on the battery side and some noise on the stainless steel side, we’ll start to see that underlying growth reassert itself,” said Mark Selby, nickel market expert.

A key factor is the ongoing convergence between prices for nickel sulfate and nickel pig iron (NPI), a less refined product primarily used to make stainless steel. After a large gap opened up earlier this year, sulfates are now trading at a small premium to London Metal Exchange (LME) nickel prices. Meanwhile, NPI discounts to the LME have compressed significantly to around 78-80% from lows of 60-70%.

“The great convergence that we’ve expected to see is still well underway. What’s interesting now is you’re starting to see pricing basically as a metal price minus a processing cost.”

This pricing dynamic is common in China, where excess capacity ensures processors earn thin margins covering only processing costs in the long run. The $3,400/tonne processing fee now showing up in pricing formulas represents the marginal cost for a typical NPI producer to refine laterite ore into an intermediate product. This likely represents a floor for how low NPI discounts can go relative to LME nickel.

“Going forward, that price is about $3,400 a ton. If sulfates don’t get back to a premium, the maximum NPI can trade at is about 85% of a $20,000/tonne LME price,” Selby commented.

Indonesian Control Over Nickel Market Growing

Indonesia’s control over the global nickel market continues increasing, with the country announcing plans for a new ore pricing mechanism expected to raise costs for NPI and mixed hydroxide precipitate (MHP) producers.

“Indonesia now controls more of the nickel market than OPEC did at its peak. They’re not going to increase prices drastically like OPEC did in 1973, but they will do what they can to extract value from their resources.”

At a mining industry conference in Indonesia later this month, the government is expected to announce a pricing formula that provides more value to Indonesia while raising input costs for Chinese nickel pig iron producers relying on Indonesian laterite ore. This represents the latest move by Indonesia to leverage its massive nickel ore reserves, which account for over 30% of global supply. The country banned exports of unprocessed ore in 2020, choking off Chinese NPI producers. It is now looking at limiting legal ore exports amid reports of significant illegal mining.

“You’ll see them flex their muscle and I think this announcement at the end of the month will be some more of that muscle flexing,” said Selby. “This talk about illegal mining and removing quotas was just the first test drive of what we’ll see more of over the next several years.”

Strong Demand Growth from Stainless Steel and EVs

In China, stainless steel production grew nearly 12% year-over-year through the first nine months of 2022, even as the economy struggled. Output of 300-series steels preferred for nickel content expanded 14% over the same period. With increases in net imports, China’s apparent consumption of stainless steel increased around 9% despite economic headwinds.

“You’re still looking at maybe an 8-9% increase this year on something that is a massive portion of overall nickel demand,” said Selby. “Analysts continue underestimating nickel demand growth long term.”

Nickel demand from electric vehicle batteries also continues showing strong growth trends, although destocking in the battery supply chain masks this currently.

In China, EV sales grew 22% year-over-year in September, with battery electric vehicle sales up 25%. Some automakers like Ford have scaled back near-term production plans amid weak sales. But overall, U.S. EV sales also continue growing at a robust pace.

“Don’t be fooled, the underlying growth is there and it will eventually come through in early 2024 I believe, once we see interest rates top out.”

As U.S. automakers ramp up EV production, demand for nickel-rich batteries using cathodes like nickel manganese cobalt (NMC) 811 and beyond will accelerate. This points to higher average nickel loadings per battery in the coming years.

Nickel Project Developers in Strong Position

With demand growth outpacing new supply additions, especially from Western sources, nickel project developers are in a strong position to attract investments and off-take agreements from automakers urgently looking to lock up long-term supply.

“The last six months, the urgency from the entire EV supply chain and automakers has been incredible,” said Selby. “They’ve come back to nickel and realized no one’s really discovered much other than around the Timmins region.”

In order to continue ramping up EV production capacity through the late 2020s, automakers and battery manufacturers need to make strategic investments to fund and secure nickel production from new projects. The conversations have evolved from simply wanting an off-take agreement in exchange for minimal pre-payment financing to much more substantial capital commitments.

"It's now ‘We need your nickel. We know we need to provide capital to fund the project and get it into production. And we'd like as much of your production for as long as possible.'"

For project developers and investors, these strategic partnerships and large investments directly into nickel projects, rather than just the corporate entities, help derisk development and represent strong validations of the resources.

With demand from the U.S. and Europe alone probably requiring over 500,000 tonnes per year of new nickel supply by the early 2030s, there are enormous opportunities for projects able to reach production within the next 5-7 years.

"We need every project in Canada. The car companies and EV supply chain are showing up and are very, very keen to see that supply come to market by the end of this decade."

The Investment Thesis for Nickel

• Resources capable of supplying 20,000 tonnes per year of nickel by 2027-2028 timeframe EV automakers want
• Low-carbon nickel aligns with automaker ESG mandates
• Located in mining-friendly Canadian jurisdiction
• Potential for additional resource expansion through exploration upside
• Strong interest from multiple potential automaker and battery partners looking to invest and lock up supply
• Initial strategic partnership provides derisking and validation
• Clear path to production with feasibility study imminent and development partner already in place
• An attractive discount to NAV offers an opportunity for substantial re-rating as milestones hit

Key Takeaways

• Nickel prices are rangebound currently but strong demand growth emerging especially from EVs
• Indonesia flexing control over the market through ore export restrictions and pricing
• Automakers urgently looking to invest in new nickel projects to secure long-term supply
• New projects in safe jurisdictions with clear paths to near-term production well-positioned

The discussion focused on the dynamics shaping the nickel market in the near term and how increased demand from stainless steel and electric vehicles is driving automaker interest in securing future supply from promising nickel projects. While prices are oscillating in the short-run, strong demand growth is asserting itself and companies located in safe, mining-friendly regions with resources capable of supplying the growing battery supply chain over the next 5-7 years stand to benefit immensely from strategic partnerships and investments.