Nickel Prices Retreat But Strong Demand Drives Race for Supply Deals

• Nickel prices have continued to fall, now around $17,500-18,000/tonne range as expected. Short positions at record highs so hard to drive price down much further.
• Convergence of nickel product premiums accelerating as prices fall - sulfates at premium to nickel briquettes, NPI discount pulling in.
• Indonesia reinforcing ban on new nickel smelters, concerns about draining resources too quickly. Expected to manage supply through mining quotas.
• Automakers and battery supply chain ramping up efforts to lock in non-Indonesian nickel supply like Canada Nickel's Crawford project. Aim to get offtake deals done by year end.
• Feasibility studies from some miners being pushed back due to higher than expected opex and capex. Laterite projects outside Indonesia have historically faced challenges.

Nickel prices have continued their retreat over the past week, with the key benchmark London Metal Exchange (LME) three-month price now hovering around $17,500-18,000 per tonne. This pullback was expected, according to nickel market expert Mark Selby, following the record high short positions currently still dominating trading activity. With shorts at unprecedented levels both in terms of quantity and value, there is limited room for substantial further downward pressure at this time. Selby believes prices may stabilize around $17,500/tonne before potentially declining slightly to $16,500/tonne, but strong production cost support should prevent a more drastic drop barring any major global economic shocks.

The softening nickel prices are accelerating convergence across different nickel products, a trend Selby has anticipated over the past year. Nickel sulfate recently moved to a premium over class 1 nickel briquettes, reflecting tightening sulfate supply and strong demand from the electric vehicle (EV) battery sector. At the same time, the discount for nickel pig iron (NPI) from Indonesia has narrowed over the past week as prices retreated. This convergence across nickel products could continue into late 2023 and 2024 if the current market balance holds, rewarding efficient lower-cost producers while squeezing margins for higher cost operations.

Indonesia Driving Market Toward Supply Control

A key driver shaping the nickel market balance has been Indonesia, home to the world's largest nickel reserves and a rapidly growing share of global nickel production driven by Chinese NPI capacity expansion. The Indonesian government has been reinforcing its ban on new nickel smelters over the past week, aiming to manage its rich mineral resources carefully rather than allow unfettered extraction by foreign companies focused on volume over value.

Indonesia is concerned about draining its economically viable nickel ore reserves too quickly, given the unique geology of its laterite deposits which occur in shallow layers of enriched soil rather than deep underground veins. Once the enriched topsoil at a given site is exhausted, the resource is fully depleted with no ability to continue mining at lower grades. With ore grades already declining from an average above 2% down towards 1.5% nickel over the past decade as easier deposits are tapped, Indonesia recognizes the need to control the pace of extraction and smelting if it wants to sustain its nickel industry for future decades.

Selby expects the Indonesian government will likely implement a system of mining quotas before year end to exert control over nickel exports, avoiding a sudden embargo but steadily squeezing global supply. This intention to flex its market power, controlling over 30% of mined nickel supply, has already impacted market psychology. A temporary crackdown on illegal mining in October sparked a price spike as buyers feared an imminent export ban, showcasing Indonesia's potential to roil markets. While panic buying subsided as calm was restored, the awareness of Indonesia's leverage has focused attention on finding reliable alternative sources of nickel supply.

Battery Supply Chain Hungry for New Sources of Class 1 Nickel

The looming Indonesian export restrictions come just as nickel demand is projected to surge over the next decade, driven by EV battery plants under construction globally. Automakers and battery manufacturers are urgently seeking to lock in additional supply from politically stable jurisdictions to feed their ambitious production targets.

Over the past three to four months, urgency around securing non-Indonesian class 1 nickel has intensified noticeably according to Selby. With lithium prices cooling from their steep spikes earlier this year, EV supply chain players have renewed their focus on nickel as the most critical battery input. Recognizing that few new nickel projects have been identified and advanced in recent years, buyers are anxious to acquire off-take rights from one of the few near-term sources like Canada Nickel Company's Crawford project.

The recently completed Crawford feasibility study results were well received by potential off-takers needed to finance construction of the large scale, low carbon nickel operation. Crawford's advantages as a North American source of sulphide nickel placed near infrastructure and renewable hydroelectric power positions it as the kind of investment opportunity battery manufacturers are prioritizing. Canada Nickel aims to finalize one or more off-take agreements by the end of 2023, which would secure a guaranteed market for Crawford's nickel at a negotiated price.

Off-take deals de-risk large mining projects for investors and provide the balance sheet strength needed to proceed with financing and development. The appetite for securing Crawford's future nickel output among downstream players has accelerated noticeably over the past few months, giving Canada Nickel confidence it will reach binding off-take agreements sooner rather than later. The bridge financing from Auramet provides operating flexibility and strengthens Canada Nickel's negotiating position to get strong off-take terms rather than rushing to close the first deal available.

Latest Company News Highlights Project Progress and Industry Developments

Several junior mining companies released new results over the past week providing updates on key nickel exploration and development projects.

Alaska Energy Metals (TSX-V: AEMC)

Alaska Energy disclosed results from two additional drill holes at its bulk tonnage nickel-copper deposit, with similar thick intervals and grades to previous holes. With drilling progressing well, the company aims to release an initial inferred resource estimate in early 2024.

Rio Tinto (ASX: RIO)

Major producer Rio Tinto has expanded its early-stage nickel exploration efforts, signing an earn-in joint venture agreement with Australia's Sultan Resources. Rio can earn up to 80% of Sultan's prospective tenement in Western Australia by spending $2 million on exploration over five years, attracted by the strong geophysical anomalies indicative of potential nickel sulphide mineralization.

Alliance Nickel (ASX: AXN) 

Australia's Alliance Nickel announced a delay in completing a feasibility study for its laterite nickel leaching project from 2023 out to mid-2024. The preliminary cost estimates came in higher than expected, requiring optimization work to improve the economics. This highlights the challenges of developing laterite projects in Australia, with first generation attempts largely unsuccessful. Investors should tread carefully evaluating these complex projects, looking closely at proven operations like Glencore's Murrin Murrin for cost guidance.

Conclusion: Well-Positioned for Nickel Demand Surge

Despite current pricing weakness, the nickel market fundamentals appear strongly constructive looking out over the next 3-5 years. High metals prices stirred a wave of new supply projects across the copper and lithium space that have alleviated concerns about shortages, but nickel has yet to see this supply response. With few new projects on the horizon and major source Indonesia looking to restrain exports, supply gaps will likely emerge. This sets up well for Canada Nickel to finalize off-take agreements by year end for its Crawford nickel project, fully capitalizing on rising demand from electric vehicle battery manufacturers. With the feasibility study complete and off-take deals nearing completion, Canada Nickel could begin construction quickly when sentiment improves, positioned perfectly to feed the coming nickel supply deficit.