Nickel prices: How did we get here and what comes next?

Nickel prices have risen substantially over the past 12 months and are edging closer to the US$9 per lb. or US$20,000 per tonne threshold that analysts believe could spur investment in new supply. Nickel prices, however, have been dogged by an anchor over the past decade, so it's important to take a look at how we got here before trying to determine what might come next.

Broadly speaking, about two-thirds of global nickel production goes into the stainless-steel market. Now impacted by pandemic-induced production curtailments, this market is currently awash with raw material. As a result, even those nickel producers intending to penetrate the high-end battery market, deal with prices impacted by the stainless-steel industry.

Stainless steel producers have the rare luxury of being able to accept all forms of nickel. They can take Class 1 nickel, which is 99.8% purity in the form of cathode, briquettes or oxide. They can take stainless steel scrap, which contains nickel, which is supplied by a significant recycle scrap industry both in Europe and in the United States. And they can also use ferronickel or nickel pig iron (NPI). Of these, NPI forms the largest part of the current anchor on nickel prices.

Anthony Milewski

To understand today's pricing, we have to look back to pre-2007, when there was a squeeze on nickel prices. To fill the supply gap, companies made big bets by investing in massive projects with multi-billion dollar capex requirements. For example, Sherritt International invested in Ambatovy in Madagascar, Vale Inco in the Goro project in New Caledonia, Sumitomo Metal Mining in Coral Bay in the Philippines, and BHP in Ravensthorpe in Australia. Every single one of these projects destroyed capital with massive cost overruns and technological challenges.

Then add some other multi-billion-dollar plays including Glencore-Xstrata and its Koniambo mine in New Caledonia, and Anglo American and Vale investing in the Barro Alto and On??a Puma projects, respectively, in Brazil.

In total, these projects were slated to bring to market between 300,000 tonnes and 500 thousand tonnes of nickel per year. The problem is these large projects took longer than anticipated to build, commission and ramp up. In many cases, they even failed to reach nameplate capacity. A supply crunch followed, and nickel surged from approximately US$6 per lb. in March 2006 to a peak of US$22 per lb., or US$54,000 per tonne, by May 2007.

The impact of 'dirty' nickel

Consumers took issue with the high prices. Investors in China, at the time still riding high on the commodity super-cycle, started to explore alternatives to get nickel units to market quickly and cheaply.

The Chinese found they had a nickel source right on their doorstep in the form of laterite ores in Indonesia, New Caledonia and the Philippines. They found the laterite ores, which typically grade about 1% nickel and over 30% iron, amenable to processing in redundant pig iron blast furnaces.

The initial forms of NPI graded low in nickel, at about 1%-2% and the balance was iron. But the Chinese found that they could get a significant amount of nickel for their stainless-steel industry by doing this, even if it was inefficient and pollution heavy.

The Chinese went from zero tonnes of nickel (NPI) supply per annum 2006 to 600,000 tonnes per annum in 2019, and the Chinese found they could cover the majority of domestic demand for stainless steel from NPI.

It's also essential to understand that in 2007, global nickel supply amounted to approximately 1.5 million tonnes. By 2020, in order to meet demand, nickel supply had grown to 2.5 million tonnes. However, of that additional ~1 million tonnes of nickel supply coming online over the last 13 years, 60% or 600,000 tonnes, is in the form of NPI from very low-cost Chinese sources.

China's NPI play pulled the floor out from the LME nickel price, and it collapsed, falling from its high of US$22 per lb. in May 2007 to a bottom of just over US$4 per lb. in 2016-17.

This was compounded by massive capital blowouts in some of the multi-billion-dollar projects such as Ambatovy and Goro, which saw budgets ballooning from US$1 billion to US$2 billion up to the US$8 billion to US$9 billion range. Very few companies were able to stomach the cratering nickel market and, as a result, these projects started to languish.

It was a perfect storm that caused Western companies to halt new investment in nickel projects. From their point of view - a perspective that lingers today - the circa US$50 billion in sunk nickel investments is lost money because nickel prices didn't support the payback periods, net present values (NPVs) or internal rates of return (IRRs).

The battery factor

Currently, about 60% of the 2.5 million tonne market goes to stainless-steel production, and the balance goes to super-alloys, chemicals, and now battery precursors. It's the last of these that has the power to change nickel's future.

Independent authorities such as Benchmark Mineral Intelligence and Wood Mackenzie estimate consumption of battery precursor materials in 2019-2020 at about 150,000-200,000 tonnes per year, with growth estimates of 25%-30% per annum.

The battery market has to use Class 1 nickel, which rules out NPI and any other type of nickel with iron content. That means about 60% of the nickel production that has come online over the past several years cannot be used in the battery market. In context, of the 2.5 million tonnes of refined nickel produced in 2020, only about 600,000 tonnes or roughly 25%, is suitable for the production of battery precursors and cathodes.

Given the steep battery-driven demand growth curve, nickel consumers are starting the flash the warning signal that within just a few years there will not be enough battery-grade metal available.

Now, because major Western investors got severely burned during the last upcycle, many investors and companies remain hesitant to invest in new production. This reticence is all the stronger because China has spotted the looming gap and is investing in new high-pressure acid leach (HPAL) production to meet the anticipated demand of nickel suitable for lithium ion battery production, with three plants currently under construction in Indonesia. HPAL is the chosen process of Chinese companies to secure nickel supply for their growing EV industry in the same context as NPI supply was brought on line in 2006-2009 to feed the nickel appetite for growing Chinese stainless steel production.

Where does nickel go from here?

China maintains that new supply for the battery sector can be brought online very quickly, similar to their introduction of NPI production in 2006-2009. As a result, despite the fact that the mining sector is famous for delays, the market continues to believe that new capacity will be achieved quickly, similar to the NPI boom of 2008-2010.

This is where it gets interesting. These projects take on average a decade to complete from construction to ramp-up to full capacity. Given the industry's track record, industry insiders, many of them members of The Nickel Institute, believe China's new capacity will in fact take longer and cost more to execute successfully.

That brings us back to the rising demand for battery-grade nickel. The question is: If nickel demand exceeds 600,000 tonnes per year for batteries, and there's not sufficient supply because the West is reluctant to act and new Chinese-controlled supply is probably several years out from completion, what's going to happen to the nickel price?

Given the limited supply sources that would be available, any production from the new Chinese plants would almost certainly prioritize their domestic industry demand. This would leave Western battery companies such as Panasonic, Umicore, and BASF, with a far more challenging time securing nickel units. Ultimately, they would find that they have to start paying a premium for material. The nickel price would therefore start to appreciate very rapidly.

Considering the risk of another paralyzing price spike, you would have thought the West would have numerous initiatives underway to develop new sources of supply.

However, most investors still refuse to move out from the shadows of the sins of prior nickel cycles, where technology issues and soul crushing multi-billion dollar cost overruns were the norm and are not allocating to the space in size. In their mind, any new nickel project needs to pass the acid test of being profitable at US$5 per lb. nickel because some commentators believe that could be the long-term baseline should China bring new HPAL nickel supply on rapidly. So instead, they appear to be waiting to see what happens with the Chinese projects being built in Indonesia and elsewhere.

Expect 2021-22 to be a telling period because that's when those Chinese lead HPAL projects in Indonesia are scheduled to come into production. If they are not available to the global market in time and in sufficient capacity to serve its needs, or if they do come online but only serve China's domestic battery industry, nickel customers in the West and the nickel price itself could be in for quite a ride.

-Anthony Milewski is the chairman of Nickel 28 Capital Corp. (TSXV: NKL). The company has an 8.6% joint-venture interest in the Ramu nickel-cobalt operation in Papua New Guinea. In addition it has a portfolio of 13 nickel and cobalt royalties on projects in Canada, Australia, and Papua New Guinea.