[ferro-alloys.com]The London Metal Exchange (LME) nickel price last week touched a year-to-date high of $16,135 per tonne.

Nickel bulls would love to believe this is all about rising usage in lithium-ion batteries for electric vehicles. The EV story has generated a tangible buzz in the nickel market over the last two years with Tesla’s Elon Musk recently fanning the flames with his call for more mines to meet demand for electrification.

However, the reality is that the recent rally is much more about that most traditional of price drivers, namely the supply of nickel ore to China’s giant stainless-steel sector.

Such old-school dynamics are going to push the global market into a period of over-supply this year and next, according to the latest forecasts from the International Nickel Study Group (INSG).

All about ore

The key metric to understanding the recent nickel price rally is the cost of nickel ore, according to analysts at Citi.

The Philippines has emerged as the main supplier of raw material to China’s nickel pig iron (NPI) producers since Indonesia banned exports at the start of this year.

The price of medium-grade Philippine ore has doubled over the course of this year to a current $74 per tonne, according to Chinese research house Custeel.

That in turn feeds directly into higher costs for the NPI producers that supply China’s stainless-steel mills.

The Indonesian ore ban is reaching “its climax” with Chinese stocks falling to “critical levels” and the Philippines heading into the monsoon season, which limits mining activity, Citi said.

The bank has a “bull-case” price target of $17,000 per tonne in the fourth quarter of this year but “from these highs we would be ready to flip cautious-bearish.”

That’s because China’s NPI production is declining as the supply chain migrates to Indonesia, which implemented its ore ban to force miners to upgrade to value-added products such as NPI.

This year “likely marks the last year when China will produce more NPI than Indonesia,” agrees JPMorgan.

The transition will see flows of Indonesian NPI become the dominant trade for Chinese stainless production.

Philippine ore prices will likely revert back to historical norms of around $35 per tonne which “will depress costs of marginal Chinese NPI smelters to around $13,000/t, thus removing the cost support for spot nickel prices,” JPMorgan said. (“Metals Weekly”, Oct. 26 2020)

Surplus ahead

Such traditional nickel price drivers, particularly the strength of global stainless steel output, will dominate the market for a while yet.

Global output of stainless steel fell by 9.4% in the first half of this year and will fall over the year as a whole despite a rebound in China, the INSG said.

Next year should be a year of recovery but by how much is very uncertain outside of China, where the consensus is for this year’s V-shaped recovery to level out.

Global nickel production, by contrast, has been relatively unscathed by the lockdowns that have hit other industrial metals and will grow strongly next year as Indonesia’s reconfigured nickel production sector ramps up.

The INSG now sees world output of primary metal at 2.436 million tonnes this year, a marginal 40,000-tonne reduction from the Group’s last forecast in October 2019. Production growth will accelerate from 2.3% this year to 6.2% next year.

The Group therefore expects the refined nickel market to register supply surpluses of 117,000 tonnes this year and another 68,000 tonnes in 2021.

These will be the first years of excess supply since 2015.

EV slow lane

What then of nickel’s EV story?

It seems to be losing some of its traction, according to LME broker Marex Spectron.

Interest in nickel and electric vehicles peaked early in October and “has reversed noticeably since then”, according to what the company calls its “Nowcast”, a series of algorithms that trawl the web to monitor around a billion text documents per year for references between specific commodities and market themes.

“This begs the question of whether the recent reversal in EV Market Focus portends a declining interest in the key demand story for the metal,” Marex said. (“Quantamental Update – Has the focus on EV as a key nickel demand driver peaked?”, Oct. 26, 2020).

This might seem counter-intuitive given all the headlines generated by Musk’s call for more nickel mines.

But covid-19 has laid low the entire automotive sector, even if EV production is bouncing back more strongly than conventional vehicles as governments prioritise “green” investment in their recovery plans.

Electric vehicles currently account for less than 5% of total nickel usage and the fear, to quote Macquarie Bank analysts, is the coronavirus will translate into “two lost years for the electric vehicle market, pushing back the requirements for new nickel supply (…) all the way out to 2025.”

This theme of deferred expectations has been playing out across the battery metals space, witness this week’s news that Australian hard-rock lithium miner Altura Mining has entered receivership due to low prices for its spodumene product.

Nickel’s role in the EV revolution has also taken something of a dent from Tesla itself, which is using non-nickel batteries in its Model 3 cars in China. The switch to lithium-iron-phosphate batteries reduces costs but also reflects technical enhancements to a product that was regarded as legacy technology just a year ago.

It is becoming clear that battery design is not going to be a binary competition such as the much-cited 1980s battle between Betamax and VHS in video-taping. Rather, multiple technologies will co-exist to feed a differentiated global market for vehicle functionality.

This is not to say that EVs won’t be a critical component of the nickel market going forwards, just that the relationship between sales growth and nickel usage may not be as linear as previously thought.

Nickel bulls may have to defer their great EV expectations for a while yet and focus on what is happening in the currently far more significant stainless steel sector. If the INSG is right, it could be a bumpy ride.

（Mining.com）

• [Editor:王可]