Nickel fundamentals are currently dominated by the stainless steel market, which accounts for 70pc of total demand for the metal. But the move towards electric vehicles (EVs) is the main driver of global demand growth in nickel, as more metal is ought for rising production of EV battery cathodes.
Nickel production growth has been driven by expansion of capacity for nickel pig iron (NPI), the class 2 product unsuitable for EV batteries. The high-grade class 1 nickel required for batteries requires more intense processing.
Including class 1 and class 2 nickel, global demand is projected to grow to 3.8mn-4.7mn t/yr by 2030, and up to 6mn-9mn t/yr by 2050, according to a report by Belgium's Katholieke Universiteit Leuven (KU Leuven) commissioned by the Eurometaux group of European producers. But supply cannot keep up with demand, with the market in a deficit for class 1 material, but a surplus for class 2.
There has been significant investment in Indonesia, with the world's largest nickel reserves, to ramp-up supply of high-grade nickel, with large volumes due to come on line this year. But this supply uses the new process of nickel matte, which involves converting laterite ore to battery-quality material — an energy-intensive process that also has a larger carbon footprint relative to that produced through sulphide ore.
"Nickel matte can produce up to 70t of CO2 per tonne of nickel, whereas traditional class 1 production emits 18t of CO2 per tonne of nickel," Geordie Wilkes of UK trading group Sucden Financial said.
Russia, New Caledonia and Canada are major producers of sulphide ore for class 1 nickel production, with Japan, Canada, Russia and Australia the major suppliers of metal produced from the ore. But on top of their current output, delivery of new material from ramp-ups at assets in these countries is still 18-24 months away.
A further challenge to the nickel supply outlook is that new projects under development outside Indonesia are more capital intensive than Indonesian capacity, with the higher cost of production likely to support nickel prices that are already at elevated levels. Benchmark nickel on the London Metal Exchange ended last year at $20,745/t, but had risen by over 60pc to $33,202/t as of 27 April.
The combination of huge demand for class 1 nickel in the EV sector and high nickel prices is pushing the stainless steel market towards products with lower nickel intensity, according to Wilkes.
"Even as it comes with consequences of corrosion resistance, we see primary nickel intensity for stainless steel declining over the next 5-10 years, with the use of secondary sources on the rise," Wilkes said.
Uncertainty around the trading relationship with Russia, producer of nearly 20pc of global class 1 nickel supply, has led to more disruption in the supply chain. While nickel is exempted from sanctions on Russia, there have been fewer takers for Russian nickel in Europe and the US, which has led to material being rerouted into China.
Downside risks to class 1 nickel demand remain, especially given high prices and, the slowdown in China's economy and a tightening of monetary policy worldwide in the face of climbing inflation.
But the EV market has proved resilient, with global sales rising by 120pc on the year in the first quarter, according to Wilkes.
With demand likely to stay robust, the class 1 nickel market is braced for short-term supply challenges and a higher carbon footprint from the use of nickel matte, until new mining and refining capacities start delivering.
