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A strong resumption of the pandemic was abruptly halted in March, when China’s Tsingshan Group said it intended to produce battery-grade nickel in its Indonesian operations.
Converting what is currently a process flow for Tsingshan stainless steel production into an input for cathode chemistry for electric vehicles would undermine nickel’s bullish talk about a looming shortage of battery-grade metal.
The three-month nickel price on the London Metal Exchange (LME) fell from a seven-year high of $ 20,110 per tonne to $ 15,665 during the first half of March.
It has since returned to $ 18,400, with voltage ripples appearing through nearby time slots against a backdrop of declining LME stocks.
The current nickel recovery has very little to do with Indonesia or the demand for batteries.
Rather, it is a combination of a resurgent stainless steel industry and a growing list of production successes around the world outside of Indonesia.
You could call it the revenge of the old nickel fundamentals.
Stainless resistance
The Shanghai Futures Exchange (ShFE) stainless steel contract has just overtaken the hot-rolled coil contract as the best performer in the national steel complex.
What’s remarkable is that the stainless steel rally has been a relatively slow affair. Stainless steel was not caught in the wider speculative wave in the iron complex in early May, a rush for money that sparked a multi-pronged government campaign against “excessive speculation.”
On the contrary, the alloy has peaked over the life of the contract despite multiple official efforts to curb commodity price inflation.
This attests to the strength of the local stainless steel industry, which came back strong from pandemic containment in China in the first half of last year.
China’s stainless steel production jumped 19% year-on-year in the fourth quarter of last year and 37% in the first three months of 2021, according to the International Stainless Steel Forum.
The boom shows all signs of continuing with a tight physical supply chain, as evidenced by the offset structure on the Shanghai futures curve.
China is once again leading the recovery in metals, but stainless steel production in the rest of the world also saw a strong recovery rebound with 12% growth in the first quarter.
Electric vehicles may be the future buzz for nickel, but stainless steel is the current driver. The synchronized recovery in what remains the largest nickel end-use sector is the foundation of the current price recovery.
Global nickel use jumped 23% in the first five months of 2021 compared to last year, according to the International Nickel Study Group (INSG).
The Group’s latest assessments suggest a global market supply deficit of 61,200 tonnes in January-May.
Supply surprises
This may come as a surprise given the recent market attention to increasing production in Indonesia as others attempt to follow Tsingshan down the road of battery ore processing.
Indeed, Indonesia’s mined and refined nickel production increased by 47% and 55% respectively in January-May, supporting a 9% increase in global primary production, according to the INSG.
However, far from Indonesia, the supply chain has suffered several blows.
Russian company Norilsk Nickel reported a 28,000-tonne, or 26 percent, drop in production in the first half of the year following the flooding of two mines in March this year.
The Oktyabrsky mine resumed full production in mid-May, the company said. However, “a higher volume of salvage work than expected” caps the throughput of the Taimyrsky mine at around 80%, with full operations only observed in November.
Falling sales from the world’s second largest producer outside of Indonesia are tightening physical markets, particularly in North America, where physical premiums are high and continue to rise.
Nickel has recently been absorbed by seemingly inexorable capacity building in Indonesia
U.S. nickel buyers face a double whammy with a key local supplier – Vale’s operations in Sudbury, Ontario – closed due to a strike since early June.
Vale, which is the world’s largest producer after Tsingshan, reported a 15% year-on-year decline in nickel production in the second quarter as the strike was made worse by unscheduled maintenance at the Clydach refinery in Wales.
Talks with union negotiators have resumed in Sudbury, according to local media, but everyone remembers the last walkout in 2009, which was only resolved after a year.
Meanwhile, local protests in Papua New Guinea have forced the temporary suspension of Glencore’s Koniambo nickel plant, while Ambotovy mine in Madagascar continues to ramp up after a year of Covid shutdown -19.
The supply landscape is currently difficult, particularly for the high purity forms of nickel normally supplied by Norilsk and Vale.
Decline in LME shares
This shortage of Class I equipment caused a scramble for metal held in LME warehouses.
LME stocks have fallen from a peak of 264,606 tonnes in April to 220,074 tonnes today, with stocks of briquettes in demand down by more than 37,000 tonnes at the start of the year.
The LME’s time spreads have become more volatile, the three-month cash benchmark period shifted to an offset last month for the first time since November 2019. It returned to contango but only provisionally, for the last time listed at $ 10 per ton.
This tension in the paper and physical markets was not expected.
Nickel has recently been absorbed by the seemingly inexorable increase in capacity in Indonesia thanks to the giant Tsingshan nickel processing experiment.
This is the key to long-term battery history and one that has taken a distinctly bearish stance.
But right now, it’s the old-fashioned nickel fundamentals of high demand for stainless steel and a stretched supply chain that are shaping the immediate pricing landscape.
(Edited by David Evans)
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