Supply Control and Shortages Amid EV Demand Supercharges Battery Metal Prices

• Nickel prices are forecast to climb back to $20,000 per ton by the end of 2024, according to Canada Nickel CEO Mark Selby. The rebound is expected to be driven by supply restrictions from top producer Indonesia and accelerating demand from the electric vehicle battery sector.
• Indonesia is emerging as a dominant, OPEC-like force in the global nickel market as it now controls nearly two-thirds of world supply, and is leveraging this position to restrict ore exports to China and push for more domestic processing, supporting higher prices.
• Demand for nickel from electric vehicles is growing rapidly, with global EV sales jumping 22% through September to reach a new monthly record, defying earlier pessimism about demand.
• Canada Nickel, Power Nickel, Talon Metals and others reporting are reporting a series of promising drill results pointing to potential new nickel discoveries worldwide.
• With nickel's critical role in electric vehicle batteries coming into focus, Western governments are starting to allocate serious capital to build domestic, diversified supply chains. An allocated $4 million to Canada Nickel is set for engineering studies under the earmarked $1.5 billion to construct new critical mineral production capacity from friendly nations.

Nickel Prices Poised for Rebound as Indonesia Exerts Control

The nickel market appears primed for a strong rebound in the coming months, with prices expected to climb back towards $20,000 per ton by year-end according to Mark Selby, CEO of Canada Nickel. Despite recent volatility that saw nickel prices dip to $15,500/ton in early this year after nearly reaching $18,000/ton in October, the fundamentals point to a tightening market.

Inventories on the London Metal Exchange (LME), while up modestly from record lows, remain historically tight at just 147,000 tons - less than two weeks of global consumption. Reported surpluses appear overstated based on actual inventories. More importantly, Indonesia is now flexing its muscle as the dominant global supplier, controlling nearly two-thirds of production.

Indonesia Becomes the New OPEC of Nickel

"Since they banned ore exports in the mid 2010s, I've been saying there is an on equivalent of OPEC on the horizon," explained Selby. "No surprise now when you control almost two-thirds of global supply of commodity, it's in your interest to limit supply so that prices are higher."

Just as OPEC did with oil markets in the 1970s, Indonesia is now actively managing nickel supply and "dividing up who gets the pie between the Chinese smelter and the Indonesian miner." The country is limiting ore exports to China and pushing for more value-added processing within Indonesia. Chinese nickel pig iron (NPI) production has taken a hit as a result.

Data points to a meaningful impact. Nickel producer ChengTok reported cutting production at their Morowali industrial park due to a lack of ore. Publicly-listed Huayou Nickel saw ore output decline. Nickel ore imports from the Philippines, a key alternative supplier, jumped from 5% to 8% of global supply to compensate. However, with the rainy season hitting the Philippines, production will fall by more than half in the coming months, further stressing ore availability.

Selby believes the market will face an inflection point: "Over the next two months I still believe that we're going to see this great squeeze in prices and it end up back at $20,000 a ton."

Electric Vehicle Demand Roars Ahead

On the demand side, growth from the electric vehicle sector continues to surprise to the upside. While some analyst firms projected EV sales slowing in 2022, global sales are up 22% through September, setting a new all-time high monthly record. Even Europe, which saw EV subsidies rolled back, returned to growth in September.

Importantly, hybrid vehicle sales are now surging, up 45% this year, adding to battery metal demand.

"You still need a battery in a plug-in car because you still have a you know internal combustion engine in the car you can't afford to have a big bulky battery so there are nickel batteries," noted Selby.

Stainless steel demand, the other major end-use sector for nickel, is also defying expectations, growing 6% in the first half. "Nickel demand we did 10% growth through the first three years of this decade you know we're going to see growth rates pretty close to that if we're anywhere close we're going to be way short of nickel," said Selby.

Junior Miners Unleash New Discoveries

The supply challenges are opening opportunities for a new generation of nickel projects to serve rising battery demand. Selby's Canada Nickel is rapidly advancing its Crawford project in Ontario, expected to be the largest nickel sulphide mine in the Western world.

Step-out drilling is revealing multiple large-scale nickel targets across its properties.

"Crawford's second largest nickel reserve, would be third largest sulfide operation globally," said Selby. "We think we have multiple Crawfords in this area."

Other explorers are also finding early success. Power Nickel intersected 40 meters of 2.5% copper and 5 grams per ton of platinum group metals at its NISK Nickel-Copper Sulphide project. Talon Metals reported nearly 100 meters of nickel-copper mineralization in Michigan. FPX Nickel demonstrated its Baptiste deposit can produce battery-grade nickel sulfate.

Governments Open Check Books to Secure Supply

As nickel's importance to electric vehicle and stainless steel supply chains comes into focus, governments are finally putting real capital to work to secure supplies. The US recently awarded Canada Nickel $4 million to conduct engineering studies under the $1.5 billion critical mineral infrastructure fund with billions earmarked for actual mine construction.

"You're going to continue to see governments throw more money, more incentives, raise more tariffs, until they start to see the mines and processing plants get built for these critical minerals in friendly countries," said Selby. "It's a generational opportunity to make a lot of money."

With the all-important US midterm elections looming, developing a domestic nickel supply chain looks to be a rare area of bipartisan agreement.

"No matter who wins the US election, it's one of the only things that both the Republicans and Democrats agree on. We can't let China and any sort of China proxies control the supply of critical minerals that make our modern economy function."

Conclusion

While near-term volatility is likely, the long-term supply-demand fundamentals point to a structural deficit emerging in the nickel market by mid-decade. As auto manufacturers rapidly shift to electric vehicle production, securing adequate and reliable supplies of nickel and other key battery metals will become a major strategic priority. Projects that can deliver scalable, battery-grade supply from stable jurisdictions outside of Indonesia look particularly well positioned.

The Investment Thesis for Battery Metals

For investors, the nickel and battery metal sector presents a compelling investment case:

• Long-term demand growth from EVs and stainless steel looks robust and underestimated
• Current supply is heavily concentrated in Indonesia, which is restricting exports to maximize prices
• Extremely low inventories point to an undersupplied market despite analyst surplus projections
• High-quality nickel projects are scarce but essential for supplying battery-grade metal
• Junior miners are advancing major new discoveries to meet the supply gap
• Western governments are allocating billions in funding to build homegrown supply chains

Key Takeaway

The next few months may provide an ideal window to build positions ahead of an expected resurgence in nickel prices towards $20,000/ton and a potential rerating of junior development plays as the investment narrative shifts from surplus to shortage. Fortune looks likely to favour the bold. As Mark Selby puts it:

"Investing in oil outside of OPEC in North America was a pretty good trade in 1973-74 for a good 15 or 20 plus years. Being investing in a commodity that's being managed effectively by a group is again a generational opportunity to make a lot of money."

To gain exposure to the nickel and battery metal sector, investors have a range of options to consider. One approach is to invest directly in leading junior nickel explorers and developers that are advancing high-quality projects with the potential to supply battery-grade nickel. Alternatively, investors can take positions in established nickel producers that are leveraged to rising prices. For those seeking diversified exposure across the battery metal complex, dedicated ETFs are available that provide exposure to lithium, nickel, cobalt, graphite and manganese. Royalty and streaming companies with nickel portfolios offer another way to play the theme while mitigating some of the operational risks. Finally, stainless steel producers could be indirect beneficiaries if nickel prices continue to rise, as they may be able to expand margins by passing costs through to customers.