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Supply Cuts Mounting as Nickel Prices Remain Low

Feb 16 2024

Early March 2022 saw the short squeeze on nickel which briefly sent prices to an all-time high of over $100,000 per tonne and subsequently sent the LME into meltdown. Almost two years later, the metal that is trading around the $16,000 per tonne mark and the outlook is very different. The fall in prices over the past year has been so drastic that the viability of nickel production is under threat for mining companies around the world.

The Road to High Prices

In 2020, the onset of the COVID-19 pandemic led to a sharp decline in nickel prices as manufacturing and industrial activities around the world slowed down, reducing demand for the metal widely used in stainless steel production and batteries for electric vehicles. However, as countries began to recover from the pandemic and stimulus measures were implemented, demand for nickel started to rebound, leading to a gradual increase in prices. The following year saw further increases in nickel prices, driven by strong demand from the electric vehicle (EV) sector, as nickel is a key component of lithium-ion batteries.

In 2022, the nickel market experienced the historic price squeeze following a massive build up of short positions by Chinese company Tsingshan, which was then exacerbated by concerns of supply disruptions following Russia’s invasion of Ukraine. Russia is a major producer of nickel, and sanctions against the country raised fears of a tight supply in the global market. The situation was further complicated by trading halts and volatility on major commodities exchanges.

In the background through this period, Indonesia had embarked on a quest to achieve and then cement its position as the dominant nation in the global nickel market. The Indonesian government introduced a combination of export bans and incentives to ensure Chinese companies would invest in both primary production and refining operations within Indonesia.

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Falling Prices, Falling Output

Indonesia’s expansion of its nickel production has seen the country grow its market share from 16% in 2017, to 30% in 2020 and then to 55% in 2023. This expansion has seen a flood of nickel pig iron (NPI) enter the market which has caused the subsequent decline in prices. NPI is a lower-quality grade of nickel than that which is used in stainless steel production or can be delivered against LME contracts, but nonetheless the excessive production has arrived during a period of stagnant demand for the metal.

China and Indonesia are set to cut their nickel production by at least 100,000 tonnes this year as a result of the falling prices, according to Reuters. However, with analyst expectations for this year’s market surplus ranging from 150,000 to 200,000 tonnes, the cuts from China and Indonesia may not be enough to arrest the downward trend in prices. Furthermore, while the increase in production over the past few years has largely focused on NPI, inventories of high-grade nickel have been building within exchange warehouses. In Shanghai Futures Exchange warehouses, stocks have risen from just 166 tonnes on June 6th 2023 to 13,312 tonnes on February 8th 2024. Over the same period of time, LME Closing Stocks have climbed from 37,368 to 71,946 tonnes, as shown in the graph below from ChAI. The continuation of building inventories in exchange warehouses will add further bearish pressure to nickel prices.

LME Nickel stocks

Industry Impact

Given that the low-cost production sites in China and Indonesia are having to scale back output, it should come as no surprise that mining companies in other regions are facing extreme pressure on their production margins. Glencore announced this week that it would be selling its stake in “Koniambo Nickel SAS (KNS) in New Caledonia and that production at KNS's processing plant will be halted for six months'' as the operation has become unprofitable at current nickel price levels, as reported by Reuters. Elsewhere, Russia’s Nornickel reported a 51% year-on-year decline in profit in 2023, driven by falling prices for nickel and palladium in particular.,

As nickel prices have declined, the financial viability of production in Australia and Canada has come under strain, with mine closures occurring in both countries within the last year. Nickel produced in these countries is often more environmentally sustainable relative to production in Indonesia and China where coal is the main energy source used in production. Given that part of the nickel demand boom was driven by its use in EVs, it is ironic that coal-powered nickel operations have been responsible for driving the price down.

However, even mines and refineries in China and Indonesia are facing cost pressures due to the current price of nickel. With LME high-grade nickel trading at around $16,000 per tonne, NPI is trading nearer $11,000 per tonne which makes it difficult for these operations to make any profit. This is according to Jim Lennon, commodity strategist at Macquarie Bank, who “estimated that NPI production costs are $10,000-$11,000 a ton and $12,000 a ton in Indonesia and China respectively” in comments made to Reuters. As a result, more production sites will likely be sold, mothballed or closed throughout the next 12 months. The question for nickel buyers is how much lower prices can sink before the supply cuts impact the market and the next trend rally begins?

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