The LME nickel price gained 6 percent in the first quarter to a short-term $18,500 a ton, which was a small consolation after a 45-percent decline last year due to surplus production of Class 2 nickel in Indonesia and sluggish demand. In addition to the short squeeze, the delays in issuing nickel mining permits in Indonesia (RKAB) and the monsoon in the Philippines, the second largest producer of this raw material, contributed to the price rebound.
Tight supply also has an impact because more than half of the global nickel output is unprofitable at the current price of the metal of about $16,500 per ton. Several operations faced rising costs and were closed in recent months, including the mines in Australia owned by First Quantum, BHP and Wyloo Metals, which resulted in losing about 2 percent of the world’s nickel reserves. This market share was held by China and Indonesia where the nickel output had soared by 250 percent since 2021 after taking measures to develop their own domestic refining capacities. Major Chinese metallurgical companies Tsingshan Group and Huayou Cobalt have launched their projects in Indonesia and are increasing the production of battery-grade nickel using technology for converting nickel pig iron (NPI) into Class 1 materials.
Strategically, Indonesia does not seek to increase nickel prices and considers the range between $15,000 per ton and $18,000 per ton comfortable. The largest nickel producer is interested in maintaining stable demand for the metal. The high cost of nickel makes battery manufacturers to switch to lithium-ion phosphate (LFP) batteries (containing no nickel and cobalt) at the expense of nickel-containing lithium-ion batteries (NMC). In China, 68 percent of all lithium-ion batteries for electric vehicles no longer include cobalt or nickel (their share was 39 percent in 2020).
Long-term global nickel supply imbalances continue putting pressure on prices. In March, Fitch Ratings lowered the forecast for the nickel price in 2024 (to $17,000 per ton from $18,000 per ton) under the influence of increased Class 1 nickel output in Indonesia and China. The forecast for 2025 was also lowered despite the expectations of metal consumption recovery in the battery manufacturing and the stainless steel sectors.
However, there are also unexpectedly positive forecasts based on the fact that Indonesia’s opportunities are not as significant as most experts believe. According to Macquarie, the global nickel market can face unexpected shortages this year.
Mine closures
If the market swings to supply shortage, it will not in small measure be attributed to the closure of a number of mining operations. The price of nickel has moved closer to the costs of the highest-cost producers, causing some projects to be shut-down. This helps in reducing the metal surplus, which will slightly decrease to 190,000 tons this year compared to more than 250,000 tons last year, according to Norilsk Nickel. Demand for primary nickel is expected to increase by 9 percent due to the increased consumption in the stainless steel sector (by 7 percent), in the alloys and superalloys sector (by 6 and 10 percent, respectively), according to Norilsk Nickel. The most noticeable increase in demand (by 26 percent) is expected in the manufacturing of batteries for electric vehicles against the backdrop of the expected start of a restocking cycle in the battery chain this year. Primary nickel production will grow by 6 percent in 2024, with the largest increase in Indonesia coming from the projects aimed at converting NPI into Class 1 nickel.
Global nickel supplies (excluding Indonesia) could see closures equal to about 225,000 tons in 2024, equal to 6 percent of nickel supply, according to SFA (Oxford). For context, Indonesia could add 300,000 tons of new production in 2024 alone if projects under construction are commissioned. SFA expects at least six nickel mines to stop production in 2024. As a result, the previously predicted nickel market surplus is expected to reduce by at least a one-third, to 330,000 tons. This remnant oversupply is expected to keep nickel prices and producer margins under pressure for the next 24 months before it begins to recover, SFA predicts.
In particular, production cuts are possible in Australia, where Ravensthorpe, the Cosmos and Savannah mines, and BHP’s Kambalda concentrator were estimated to be cash-flow negative in the third quarter of 2023, the SFA review says. Australia’s nickel production is expected to fall by 19 percent this year to 165,000 tons.
Norilsk Nickel is also set to reduce its nickel output, although the expected reduction is explained by scheduled smelter maintenance, and not cost-related. Nickel production guidance is down 17-22 percent to 184,000-194,000 tons, compared to last year.
In addition, SFA also expect temporary closures from ferronickel operations in 2024 at EuroNickel (North Macedonia), Falcondo (Dominican Republic), and Yildrim (Serbia). Ferronickel and nickel hydroxide production in New Caledonia is set to shut down as Glencore and Eramet announced they would stop funding the operations on the island. The management of the French mining company Eramet warned that supplies of cheap nickel from Indonesia were expected to drive competitors out of the market in the coming years.
Operation closures and output cuts in Australia and Russia increase global emissions per ton of metal produced, making the share of ‘dirty’ metal higher and reducing the amount of ‘green’ nickel available to end consumers that is not controlled by China. Australian nickel producers market their metal as ‘green’, as opposed to ‘dirty’ nickel from Indonesia where operations commonly use coal power plants and nickel ore mining requires significant deforestation. Nornickel produces nickel with the lowest carbon footprint per ton of metal, and the company is one of the largest producers of refined nickel.
In addition, most of the output cuts come from mines producing battery-grade nickel (Class 1), its stocks are still relatively lean on the LME; while Class 2 production (NPI and ferronickel) is where cuts are really needed to balance the market. But Indonesian mining has low raw material costs, and the integration of Indonesian NPI into Chinese supply chains is likely to make it more sustainable, the SFA review says.
There is no way to stop Indonesia
The supply glut in the market will not affect Indonesia’s plans to continue increasing the nickel production, Septian Hario Seto, Deputy of Investment and Mining Coordination to the Minister for Maritime Affairs and Investments of Indonesia responsible for the mining sector, told the Financial Times in late March. Indonesia’s battery-grade nickel output is expected to quadruple to 1 mn tons by 2030. And nickel pig iron production capacity is likely to increase by 15 percent over the next three years from the current level of 1.9 mn tons.
“We don’t see any reason why we should not expand production of nickel for battery materials. The responsibility for us as the biggest nickel producer is to supply enough nickel so that the EV [electric vehicle] transition can progress smoothly,” explained Seto.
The Indonesian official believes that increased output amid cuts elsewhere would help stabilise prices for the metal. He projected long-term nickel prices would be between $18,000-19,000 per ton. A price rise beyond this range could push automakers to abandon nickel-based batteries in favor of cheaper nickel-free options. “In the short term, you enjoy a very good profitability with higher prices. But if this level is maintained, you sacrifice long-term demand,” the official argues. He referred to the negative example of cobalt, the high cost of which amid the limited global reserves and the poor reputation of the main producer forced the market to look for ways to replace it.
According to Benchmark Mineral Intelligence, Indonesia’s nickel output will rise to 3.02 mn tons by 2030 from 1.71 mn tons in 2023, and the country will account for 65 percent of global supply of the metal, up from 51 percent last year.
Overestimation of inventories and underestimation of demand
Australian bank Macquarie is more bullish about the nickel market and offers a different approach to evaluating the non-transparent Chinese and Indonesian inventories. According to Macquarie research published in March, the nickel market surplus is not as significant as previously expected. That said, supply and demand fundamentals are tighter than most experts predict, and the market is on its way to balance.
Macquarie revised downward its 2024 surplus expectations to 36,000 tons from 125,000 tons and added that the market could even slip into deficit if the Indonesia’s nickel supply rise would be below 13 percent this year. The bank made an assumption that nickel output in China was often double counted, which created the illusion of a huge excess supply and a consumption growth was underestimated.
“The perception of a massive overhang of unsold nickel, especially NPI, appears to be wrong and is unsupported by feedback from China of relatively tight NPI markets,” Macquarie said in its review.
Indonesia’s slow pace of issuing domestic mining licenses (the process to issue permits was changed due to allegations of corruption) is indicative of a possible ore shortage, according to the Australian bank. At the same time, the cost of nickel production in this country is rising.
According to Macquarie forecasts, the metal consumption in China’s stainless steel and high-nickel alloys industries is expected to grow by 20 and 25 percent respectively this year. Macquarie says that after no growth in the battery market in 2023 on persistent destocking, demand for nickel in batteries is also on track to rise sharply.
Tighter fundamentals and lower supplies this year mean that the LME nickel prices may have bottomed out at around $16.000 per ton and now mostly have upside potential, Macquarie believes. The bank said it was still possible for nickel supply growth to accelerate again and contribute to the surplus growth, but the market has now reached the low point of the current cycle.
Favorable half-year for nickel
UBS analyst Dim Ariyasinghe shares a similar opinion. Despite the rapid growth in the Indonesia’s nickel supply, the market may be overestimating the supply given the accelerated decline in nickel ore grades, limited large deposits, rising mining costs and geographic challenges, he believes.
StoneX predicts that growth in demand will outpace the growth in supply in the first half of the year, and as a result, the global market surplus in the second quarter is expected to decrease to 40,000 tons from 93,000 tons in January-March. But tensions are set to start easing in April as Indonesia promises to speed up the pace of issuing the permits. Since the benchmark nickel price reflects the high-grade refined nickel fundamentals, price increases to $20,000 per ton are only possible if the NPI intermediate product shortage starts impacting the Class 1 nickel market, StoneX notes. Since this is not yet the case and nickel inventories are rising, StoneX expects the metal prices to peak in the first half of the year.
According to Norilsk Nickel, the situation with nickel surplus in Indonesia may change this year because the new authorities of this country are interested in stopping the dumping that is beneficial to China. “In fact, the entire value chain is built on the fact that Indonesia doesn’t benefit from the added value from production, the gains go to China. The Indonesian government is aware of this and wants to change the situation. Probably, it is a matter of time - the next year or two,” said Anton Berlin, vice president and head of the company’s Sales Division, at the end of March.
Sergey Bondarenko for Rough&Polished
