Today, I’m taking a deep dive into the ill-fated nickel market.
If you’re a close follower of commodity markets, you probably know the problems afflicting this sector. Surging output from Indonesia’s nickel laterite mines has flooded the market with new supply.
And if you’ve been listening to the commentary on nickel’s woes, you’ll probably consider this an uninvestable sector. Supply gluts are set to exceed last year’s numbers, according to some analysts.
In response, Australia’s nickel mines are shutting up shop. Andrew Forrest’s Wyloo Metals put its nickel operations in Kambalda, Western Australia, recently acquired through a takeover of Mincor Resources, on care and maintenance.
Meanwhile, BHP’s (NYSE: BHP; LSE: BHP; ASX: BHP) Nickel West operations have been put on notice.
The global response to oversupply has been predictable and unanimous. Operations are shifting into care and maintenance. Over time, that will take supply off the table.
While it will take time, Indonesia’s dominance could create structural problems for the global nickel market. Concentrating supply into a single region will make the sector less responsive to rising demand.
It also exposes the nickel market to sudden production cuts. As mines close abroad, the country has free rein to reduce supply and influence prices. Indonesia is truly becoming the OPEC of nickel!
But there’s more than meets the eye regarding this important industrial metal. So, let’s tap into the nitty gritty before unpacking possible opportunities.
Nickel geology overview
Nickel deposits come in two forms: hard rock sulphide deposits, which consist of nickel-bearing minerals known as pentlandite and nickel laterite deposits.
Sulphide deposits are scattered worldwide, from northern Europe, South Africa, Canada and Western Australia.
We then have the laterites, which typically form in high-rainfall equatorial regions. As rain dissolves and removes minerals and elements from the soil it leaves behind immobile elements like nickel, iron and aluminium. That leads to a natural concentration of nickel in these regions.
There are outliers. Shifts in the global climate over geological history have enabled places like arid inland Australia to form laterite deposits. This region was once bathed in tropical rainfall and lush jungle.
But of the two sources of nickel, sulphides are far easier to process and refine into high-purity products, the ideal choice when it comes to EV battery material. For this reason, sulphide miners have retained a competitive edge.
However, that started to shift in 2018 when the world’s largest nickel producer, China’s Tsingshan Holding Group, announced a US$700-million plan to produce battery-grade nickel from nickel laterites. Processing laterite ore into high-purity nickel uses a system known as high-pressure acid leaching (HPAL). The innovation unlocked a swathe of new supply and Indonesia’s nickel output exploded after integrating HPAL technology in 2018.
Cloudy data in nickel outlook
In early March, the Macquarie Group’s nickel expert, Jim Lennon, claimed supply gluts could be overblown.
That assessment was based on a recent visit to China which led Lennon to conclude that the demand for stainless steel and other nickel alloys is far higher than the official numbers report. According to Lennon, nickel inventories are also far lower than the stated figures. In other words, he believes the consensus forecast of a nickel oversupply is wrong.
It’s an interesting perspective. Chinese officials are known for under or over-reporting figures to suit political motives.
But are Lennon’s observations, alone, enough for investors to move into this beleaguered market? Perhaps.
Resource stocks coming off a low base can result in large ‘recovery gains’ as sentiment creeps back into the market. It’s also worth noting that U.S. officials recently excluded Indonesian nickel from lucrative tax credits as part of its Inflation Reduction Act (IRA). That’s thanks to a tight interlink between Indonesian operators and Chinese investors.
So, where does that leave investors?
Everything is not what it seems in the nickel market and that’s where contrarian opportunities are born. Given that China plays a major role in supply and demand, this suggests there could be a lot more to this story. The data remains cloudy, meaning there could be more surprises in the months ahead.
A prime value opportunity may emerge with several nickel producers and explorers trading at multi-year lows, a theme I’ll explore over the coming months.
James Cooper runs the commodities investment service Diggers and Drillers. You can also follow him on X @JCooperGeo.
The article doesn’t really address the massive environmental devastation caused by the Chinese-funded Indonesian laterites and HPAL processing. It’s a triple-disaster:1.) environmentally, with poor mining practices, landslides, massive amounts of lateritic material washing into the rivers and the ocean, combined with 2.) the toxic HPAL processing, and 3.) power generated largely by plants fueled by low-rank coal. No one can compete with the Chinese when it comes to their willingness to cut environmental corners to get market share. The only solution is a total ban on any Ni products made from the Indonesian / Chinese funded HPAL laterite Ni. The question is, will the big metal trading companies step up and do the right thing in terms of ESG, or will they say “nothing to see here!” (like the old Nazi gold business in World War 2 Switzerland!). The other question is, even if they really wanted to, is it possible to trace the clean finished battery grade Ni product back to source?….that could be difficult or impossible, and I’ll leave it to you whether to trust the Chinese “chain of custody” digital “paperwork” that would accompany the product. Yes, a really good large Ni sulphide deposit (let’s say 3% Ni, 2% Cu, 3 g.t PGE) could still compete nicely with the Indonesian laterites, but a lot of the “0.3% Ni equivalent” big peridotite and dunite bodies with a wee bit of actual sulphide Ni being touted currently as ore deposits, or even those decent +/-1% Ni sulphide deposits are probably going to be toast!