• Nickel price has dropped as expected but strong underlying demand growth of around 9-10% projected for 2023.
• Surpluses are due to in-process inventory build-up; analysts not accounting for this fully.
• The cobalt market has significant surplus coming, especially from new Chinese and Indonesian supply.
• Canada Nickel Corp's Feasibility Study results were positive with $2.5B NPV, 17.7% IRR, and carbon capture to enable net negative footprint.
• Strategic partner would validate project and demand outlook, attracting more investors wary of Indonesia flooding market.

Nickel Fundamentals Strong Despite Price Drop

After months of predicting its arrival, the recent drop in nickel prices came as no surprise to industry analysts like Mark Selby, CEO of Canada Nickel Company. Nickel prices have pulled back in recent months from over $20,000 per tonne to settle into a range of $18,000-19,000 per tonne. However, this correction was expected, as prices needed a break after being above $20k for an extended period. Over the next 6-8 weeks, prices could dip to around $17,500/tonne to test support levels before rebounding by year-end.

This aligns with previous calls made for months that Nickel would see a sell-off before recovering. In particular, the electric vehicle market is beginning to accelerate in North America and Europe. This contrasts with earlier adoption in China and other Asian markets, where lower nickel lithium iron phosphate batteries sufficed for smaller cars and shorter ranges. The larger battery packs required by trucks and SUVs in Western markets will significantly increase nickel demand.

Global nickel demand growth should be around 9-10% for 2023, nearly double most analysts' estimates. This stems from their failure to properly account for apparent surpluses coming from inventory buildup within the nickel supply chain. As new nickel projects develop, from mining through refining to battery materials, substantial in-process inventory gets embedded across the links rather than exiting as a final product. For example, mines need on-site stockpiles, refineries require feed buffers, and precursor producers must hold cathode inventory. Selby believes the true nickel surplus is far less than commonly cited once this inventory effect gets incorporated.

Drilling down, the recent London Metal Exchange (LME) stock increases reflect that embedded inventory getting drawn down and sold as refining capacity ramps up. However, Selby expects exchange stocks to peak by mid-2024 as demand growth reaccelerates. He points to stainless steel's robust production rebound, particularly in China, as an additional driver. Selby remains confident in the long-term nickel bull case despite the current pause.

Demand Growth Remains Robust

Importantly, this price drop does not indicate weakening fundamentals. Underlying nickel demand growth globally remains very strong, at 9-10% this year. This is nearly double most analyst estimates heading into 2022. Demand is being driven by both the electric vehicle (EV) and stainless steel markets.

For EVs, analysts failed to properly account for the transition occurring from smaller EVs in the Chinese and European markets to larger, long-range EVs in North America. These larger vehicles overwhelmingly use nickel-rich batteries. With September 2022 EV sales in China up 33% and Europe up 27%, North America saw a 60% surge as consumers shifted to trucks and SUVs. More nickel per vehicle is needed to feed this high-growth market.

Stainless steel, accounting for two-thirds of nickel demand, continues its robust expansion as well. Production in China is up 13-15% this year, offsetting slower growth elsewhere. As a versatile, strong, recyclable material, demand keeps rising steadily. This diversity insulates Stainless Steel from a China slowdown.

New Supplies Absorbed by Demand

Analysts also overestimate the impact of new nickel supplies, as in-process inventory is not counted properly. As new projects ramp up, metal is stockpiled to feed the downstream supply chain. While exchange inventories rise in the near term, this does not reflect true surplus. Indonesia's new capacity will be readily absorbed by demand growth rather than oversupply markets. Discounts for Chinese nickel pig iron are already declining as fundamentals reassert themselves.

Cobalt Faces Bigger Glut

One knock-on effect of new Indonesian and Chinese nickel supply will be a prolonged cobalt surplus. HPAL projects produce substantial cobalt units beyond what's required. With Glencore already idling some assets, a multi-year cobalt downturn seems likely despite its byproduct nature. Nickel demand remains strong enough to absorb this extra supply without collapsing pricing.

With several Chinese projects underway and HPAL ramping up, a prolonged cobalt surplus seems likely. Prices could hit single digits for years until production shuts in. This further delays any nickel oversupply from HPAL.

CNC Feasibility De-Risks Flagship Asset

Shifting to company developments, Canada Nickel Company (CNC) released a feasibility study on its Crawford nickel-cobalt project in Ontario, Canada. The results were well received, highlighting Crawford as one of the world's largest nickel resources and now reserves.

With 2.5 billion in NPV at a 17% IRR, it could produce 50,000 tonnes of nickel annually over 41-years. As an open pit, lower-cost operation, Crawford boasts $546 million annually in  free cash flow. The scale makes it attractive to potential acquirers. CNC is also pursuing carbon capture and storage, with a 1.5 million tonne per year capacity. This results in a carbon-negative footprint 30 tonnes lower per tonne of nickel versus the industry average.

The study represented a major derisking milestone. CNC is now focused on securing an off-take agreement with a strategic partner by the end of 2023. A downstream battery or auto manufacturer investing directly into Crawford would validate the asset and growth potential. This could spur a re-rating as investors gain confidence in new North American supply to feed EV growth. While nickel prices corrected as expected, demand drivers remain robust in the face of inflated supply concerns.

Coming off the London Metal Exchange week, Selby found producers, consumers and traders largely aligned on market fundamentals. Strong aerospace and defense activity in the US points to increased nickel consumption relative to current capacities. Some onshoring of manufacturing could further boost demand. Additional melt shop capacity seems warranted.

He also addressed questions about declining recovery rates. Much of this stems from an initial 62% recovery result from a single high-grade sample. The actual project range sits between 40-50% in line with similar deposits. Pilot plant samples targeted downstream testing across multiple ore types rather than precisely replicating deposit averages. The important point is the 23% improvement from enhanced flow sheet design versus the PEA. Ongoing optimizations continue.

Looking ahead, Selby stresses that a strategic partner would truly validate the Crawford project in investors’ eyes. After extensive due diligence spanning years, their capital commitment signals confidence in both Canada Nickel and, more critically, the North American nickel supply outlook. For institutional investors still assuming Indonesia satisfies all demand, this endorsement provides a pivotal shift in the narrative regarding geographic supply sources. The next few quarters will prove pivotal as Canada Nickel advances toward a construction decision.