Nickel price nearing key threshold to spur investment

Nickel prices are drawing closer to the $20,000/t threshold required to spur investment in new supply. The LME three-month (3M) contract was up by more than 30pc year on year at $18,133/t yesterday, amid rising demand expectations and strengthening macroeconomic conditions.

The LME 3M nickel contract has not neared $18,000/t since September 2019, at which point rising prices prompted profit-taking as investors that had previously bought at lower levels sold material back to the exchange and purchased again when prices fell to a subsequent low of $11,142/t on 23 March 2020.

Prices have since built back above $18,000/t on expectations of higher demand for nickel-manganese-cobalt (NMC) batteries and strengthening macroeconomic outlooks. Bullish demand from the battery sector in 2020 — which contributed 5pc growth in overall nickel demand — has underpinned the steep price gains, with demand from the stainless steel sector estimated to be up by just 2pc in 2020, according to Russian mining company Nornickel. Demand from the plating, specialty steels, superalloys and chemical sectors fell at double-digit rates over the year.

The less bullish outlook for demand from the stainless steel sector is borne out in the cathode market, with Argus-assessed Rotterdam premiums down by 27pc on the year at $170-190/t in-warehouse. The divergence between headline LME prices and these premiums illustrates the changing fortunes for nickel between its traditional and dominant end-use market — stainless steel, which is facing slow demand growth — and the new energy sources of demand for NMC.

The choppy V-shape price path for nickel shows prices building steadily over the past few years, with the base price resistance rising to around $11,000/t in the most recent trough from $8,000/t in January 2016 (see chart). The breakeven point for some second-quartile producers has now risen above $10,000/t, which is around the 50th percentile of primary production costs and indicates that prices are becoming more constructive for the majority of primary nickel producers.

Analysis using bollinger bands — a tool typically used for highly liquid assets that help identify if an asset is overbought or underbought — further underscores the momentum within the nickel price rally (see chart). Daily LME prices and the 30-day moving average have maintained the same pattern since 2020, repeatedly meeting the upper band resistance levels before rebounding from the moving average line.

Tight market in need of new mine development

Market participants have long been eyeing the $20,000/t threshold as critical to unlocking fresh supply, with some laterite nickel projects expected to begin construction if prices rise sufficiently — particularly in Indonesia.

One such project is Tsingshan Holding Group's project at Morowali on the Indonesian island of Sulawesi. The high-pressured acid leaching (HPAL) facility is designed to produce 50,000 t/yr of nickel and around 4,000 t/yr of cobalt. The price tag was initially estimated at $700mn but market participants expect the full price of construction to exceed $1bn — equating to a $20,000/t level of capital expenditure. The project has been delayed until at least 2022 and key nickel producers and traders say these types of complex HPAL projects are highly likely to experience cost and time over-runs.

With projects delayed and supply tight, Nornickel expects the global market to be in a surplus of around 75,000t this year, although this would require supply to increase by 4pc to 2.64mn t — a key risk to the forecast. Demand is also set to grow, by 6pc to 2.57mn t this year, driven mainly by stainless steel requirements in Indonesia and the long-term trend for growth in nickel demand from battery producers.

By Maximilian Court

Sustained V-shaped nickel price path $/t

Bollinger bands demonstrate upward momentum $/t