The nickel market has come under considerable scrutiny over the past 12 months, and it seems this is not likely to change any time soon. In a recent market outlook statement, BHP Group noted that the rules for LME delivery of metals are “long overdue” reform, and that this was exposed by the nickel short squeeze of last year. This reform may come sooner than expected, though not from the LME, as on Wednesday 23rd January Reuters reported that the CME Group plans to launch a nickel contract in partnership with a new trading platform set up by Global Commodities Holdings. In this week’s article, we will look at how the nickel market has developed over the past decade, recap the past year of difficulty and assess ChAI’s outlook for the metal in 2023.
Decade of Development
In the aftermath of the 2008 financial crisis, nickel prices sank to around $10,000 per tonne due to a mix of plentiful supply and weak demand. However, in the following years, prices were increasingly driven higher by demand from the stainless steel sector, which accounts for over 70% of global nickel consumption. Additionally, the rise of electric vehicles and renewable energy technologies increased demand for nickel, which is used in the production of batteries and other components.
During this period, Indonesia emerged as a major player in the nickel market. The country, which had previously produced large quantities of raw nickel and primarily exported the material to be refined in China, announced a ban on the export of refined nickel in 2014 in an effort to boost its domestic processing industry. This led to a surge in demand for nickel pig iron, a low-grade form of nickel that could still be exported. As a result, Chinese producers began investing heavily in Indonesian nickel mines and processing facilities.
However, in 2019, Indonesia announced that it would ban exports of nickel ore altogether, in an effort to increase the value of its exports and further promote domestic processing. The ban caused a surge in nickel prices and also led to a scramble among Chinese producers to secure alternative sources of nickel, with many turning to the Philippines, which overtook Indonesia as the world's largest nickel ore exporter.
In 2020, the COVID-19 pandemic had a significant impact on the nickel market, as it did on many other industries. Nickel prices initially fell as demand from the stainless steel sector weakened due to a slowdown in construction and manufacturing. However, demand for nickel in batteries remained strong, particularly as the pandemic highlighted the need for a transition to a more sustainable economy.
Year of Disruption
While the landscape of the nickel market has changed significantly over the past decade, in 2022 it faced disruption from which it hasn’t yet recovered. Prices had been rising rapidly at the start of the year due to the recovery of the global economy and then accelerated due to the uncertainty caused by Russia’s invasion of Ukraine. Then, on March 8th, the market exploded due to a short squeeze. Chinese nickel-maker Tsingshan Holding Group had built up a massive short position, estimated at more than 150,000 tonnes, banking on a downturn in prices. However, as the LME benchmark climbed higher, Tsingshan had to keep buying more nickel to cover the short position and in doing so, further pushed prices higher.
On March 8th, nickel prices climbed from around $48,000/mt to over $100,000 during intraday trading, leading to the LME suspending activity on the metal and wiping out the majority of transactions from the day. The incident represented how dislocated the financial and physical nickel markets had become, and sowed seeds of distrust among participants regarding the exchange’s ability to govern metal trading.
While trading did restart just over a week later, with daily limits set on price movements, the exchange had already suffered sufficient damage to its reputation. Speculators fled the market due to the unpredictable volatility; the image below shows ChAI’s Driver Detail graph for LME Positions on Nickel, and the decline in volume for both Long and Short Non-Commercial positions since March is stark. This fall from grace was compounded in June by the news that Elliot Management, a US-based hedge fund, was suing the LME for $456m over the cancellation of nickel trades during the short squeeze.
ChAI’s Driver Detail chart showing LME Nickel Prices vs Long and Short Non-Commercial Positions, 23/02/23
The most recent disruption to the nickel market came earlier this month when Trafigura launched a lawsuit against Singapore-based businessman Prateek Gupta over allegedly fraudulent nickel transactions. Trafigura paid over $500m for containerised nickel from Gupta’s multinational UD Group in 2022, only to open a number of the containers on their arrival in Rotterdam and discover they contained none of the promised metal. While this case is likely to rumble on while an investigation takes place, the dispute means that over 20,000 tonnes of nickel that were thought to be available in the market has potentially evaporated overnight. This fiasco has added further concern in the market about how nickel is traded, both physically and financially.
CME To Seize Opportunity?
On Wednesday 23rd February, Reuters broke the news that the CME Group is looking to offer an alternative nickel contract to their transatlantic rivals. The CME is partnering with UK-listed Global Commodities Holdings (GCH), a company that is launching a trading platform in March which will only allow participants who are directly involved in the market. By preventing the speculative community from trading on the platform, the idea is that the pricing will offer a more accurate reflection of the true value for the metal. The CME will then offer a financialised contract for nickel which references the GCH price. Assuming that this plan materialises, it is difficult to envision that the LME will continue to retain its remaining liquidity amid the combination of popular distrust and an accessible alternative.
While the disruption of the past year might suggest that nickel should be avoided wherever possible, the reality is that demand is only likely to keep increasing. It remains to be seen whether the Chinese property sector will recover to its pre-pandemic status, as the massive amounts of construction was a significant driver of nickel demand through the proxy of stainless steel. Nonetheless, as many countries and companies continue to push for an electric future and batteries become more valuable than ever, nickel will only become more relevant.
