(Repeats Friday's column with no changes to text)
* The opinions expressed here are those of the author, a
columnist
for Reuters.
* Tsingshan sends nickel into a nosedive: https://tmsnrt.rs/3bYZnlf
* Fund positioning on LME nickel contract: https://tmsnrt.rs/2MV2Ysg
By Andy Home
LONDON, March 5 (Reuters) - Nickel has endured its worst
week in almost ten years, with the London Metal Exchange (LME)
price collapsing by 16% in the space of two days to a
three-month low of $15,830 per tonne.
The trigger for the ferocious sell-off was an announcement
by China's Tsingshan Holding Group that it had signed deals to
deliver nickel matte to two Chinese battery materials suppliers.
Tsingshan has rapidly emerged as one of the world's largest
nickel producers, its Indonesian mines pumping nickel pig iron
(NPI) into a local stainless steel plant the company brought
online in 2017.
It is a self-proclaimed disruptor of the stainless steel
market and it's now disrupting nickel's bullish electric vehicle
narrative.
The conversion of NPI to matte for processing into
battery-grade nickel sulphate is another twist of nickel's
alchemical Rubik's Cube and one which, according to Citi, "could
rock the long-term investment case for nickel".
The news was certainly enough to rock the nickel market this
week.
BRIDGING THE MATERIALS GAP
Nickel's growing usage in lithium-ion batteries and the
accelerated roll-out of electric vehicles (EV) are not in doubt.
The case for higher prices, however, rests on the assumption
that only certain types of nickel can be processed into battery
precursor materials.
Indonesia is now both the world's largest nickel producer
and the fastest-growing one, with national mine output surging
another 41% last year to 853,000 tonnes, according to the
International Nickel Study Group.
Until now, however, all this nickel has been converted to
NPI for the stainless steel sector.
Several Indonesian players are currently trialling the
conversion of nickel ore to battery-grade material using
high-pressure-acid-leach processing, a technology that is
notoriously difficult to master.
Tsingshan is now opening up another bridge between ferrous
and battery grades of nickel by going down the matte route.
"There is not a chemical reason why this cannot work but we
note that it has not been done before," said Goldman Sachs.
("Nickel: Down but not out", March 4, 2021)
And it comes with some serious drawbacks that may limit its
potential impact on global battery supply chains.
CARBON HEAVY
Leaving aside the question of whether Tsingshan can actually
deliver on its promise to supply 100,000 tonnes of matte within
a year from October, the matte conversion route requires an
alignment of NPI, matte and sulphate premiums to be consistently
profitable.
It also comes with a heavy carbon footprint, which is two to
four times higher than using high-pressure-acid-leach
technology, according to Goldman Sachs.
Given that this is material for powering "green" electric
vehicles, a high-carbon processing route is unlikely to win over
the likes of Tesla.
Goldman's view is that "China will likely be the only
destination market for this nickel which (...) is a very
important limitation on the impact from Tsingshan's strategy on
the broader EV market."
The investment bank projects nickel demand from EV batteries
to grow by 400,000 tonnes between 2020 and 2025 with the Chinese
market accounting for 70,000 tonnes.
Goldman's conclusion is that Tsingshan's disruptive
processing path will not be enough to affect supply deficits for
battery-grade metal. The bank is holding its 12-month price
forecast at $21,000 per tonne.
Citi analysts are more cautious.
If Tsingshan can supply even part of China's battery demand,
it "could loosen nickel balances over the next few years" and
push back the need for higher prices to incentivise new
battery-grade projects. ("Nickel Deep Dive", March 2, 2021)
SENTIMENT IMPACT
If the impact of Tsingshan's disruptive technology on
physical market balances is uncertain at this stage, so too is
the effect on investor sentiment.
Nickel's green credentials have drawn increasing amounts of
speculative money into both the London and Shanghai markets.
Money managers are currently net long of the LME nickel
contract to the tune of 34,581 contracts, close to December's
record high of 38,800 contracts. Players in the "other
financial" category are also as net long as they've been since
late 2019.
Citi describes positioning as "stretched" and has identified
110,000 tonnes of holdings in nickel exchange traded products,
"which may or may not overlap with the circa 500,000-tonne net
speculative LME position".
The severity of this week's price collapse underlines
nickel's sensitivity to changes in investor sentiment with
nickel bulls now risking regular whip-sawing from both the
stop-start EV roll-out story and the continuously evolving
nickel raw materials puzzle.
MANY ROADS TO MARKET
Tsingshan's proposed use of matte to connect ferrous and
battery production streams comes with as many questions as
answers.
But no-one doubts the company's research and development
credentials. It has led Indonesia's downstream nickel charge
from ore to pig iron to stainless steel. Its giant new
Indonesian mill has already upended the regional stainless steel
market and is has made no secret of its desire to do the same in
nickel.
The chances are that even if its timeline looks highly
ambitious, it will get there in the end.
It's a warning to nickel bulls that the market's current
battery narrative is likely to become a lot more ambiguous in
the years ahead as multiple processing routes to battery-grade
nickel sulphate open up.
This supply-side complexity is mirrored by fluidity on the
demand side as multiple battery configurations compete in the
burgeoning EV market.
A new generation of lithium-iron-phosphate batteries, which
don't use nickel, is grabbing a growing share of the Chinese
market. The technology has even got the Elon Musk nod of
approval.
The Tesla boss tweeted on Feb 25 that "nickel is
our biggest concern for scaling lithium-ion cell production.
That's why we are shifting standard range cars to an iron
cathode. Plenty of iron (and lithium)!"
Well, there's plenty of nickel around as well. It's just
that no-one's been able to work out how profitably to convert
ore to sulphate via matte.
Tsingshan clearly now thinks it can.
(Editing by Kirsten Donovan)