The energy transition is inevitable because fossil fuels will sooner or later run out. The demand for key metals for it will increase rapidly. One of these will be nickel. However, in its case, the situation is not as simple as it may seem.
- Nickel prices two years ago were at the centre of a speculative frenzy on the London Stock Exchange
- Despite sharp discounting, nickel is still almost twice as expensive as before the pandemic
- The metal's quotations have collapsed exponentially this year
Crazy nickel prices
Nickel prices listed on the London Metal Exchange has fallen by 40% since the beginning of this year. Currently, a contract for a tonne of the metal must be paid around US$18.6k.
Nickel quotations remain almost 75% above pre-COVID prices. This is the highest among industrial metals, and at the top of all commodities overall.
Chart: Change in prices of major commodities relative to pre-pandemic levels. Source: IMF, HSBC.
One of the key factors behind the fall in prices has been the weak Chinese economy, particularly the disappointing recovery in Chinese demand. The latest data from the Middle Kingdom shows that the country is still struggling to rebound after prolonged COVID.
China is the world's largest producer and consumer of stainless steel accounting for 70% of total consumption of this metal. As a result, it is key to nickel demand.
What's more, demand for nickel in China has increased rapidly in recent years. Between 2016 and 2020, the Chinese economy's demand for the metal increased by 23%, compared to just 2% for the rest of the world.
Indonesia is the world's largest producer of nickel. The country has the world's largest reserves of the metal and accounted for 36% of global supply in 2021. However, much of Indonesia's production is lower purity grade 2 material, used in the production of stainless steel.
The next largest producers are the Philippines with 13% of global production and Russia with 9% of. Nickel demand for clean energy technologies in 2040 is expected to be between six and 19 times higher than in 2020. In 2021, 2.7 million tonnes of nickel were produced.
Nickel is a key metal for the energy transition
Stainless steel accounted for around 64% of nickel demand in 2022. However, the metal is also used in battery and rechargeable battery production, and its use has increased significantly in recent years. In 2021, around 13% of global nickel consumption accounted for battery cathodes, compared to less than 3% just six years earlier.
Battery nickel demand only accounts for around 15% of total demand in 2022, but is still the dominant driver of growth. Analysts at HSBC bank estimate that it will account for 28% of total demand by 2027.
They also believe that the nickel market will remain in surplus in the short term due to strong production growth.
"Weak demand and increased supply continue to affect prices. Nickel intermediate prices have also come under pressure, as have prices for other battery raw materials. The announcement of an extension of tax breaks for electric vehicles in China may provide some support, but we believe that, in general, the nickel market will be in surplus due to strong production growth and we believe the price decline reflects these market conditions," HSBC analysts noted.
"We expect that China's stainless steel production to increase by about 3% y/y in 2023, lower than previously expected due to slower-than-expected demand growth and weak macroeconomic data in recent months. We forecast China's stainless steel production to grow at around 4.5% per annum from 2023 to 2027," HSBC experts said.
"On the supply side, we forecast that refined nickel production will increase by 10% year-on-year in 2023, with an average growth rate of 7.1% between 2023 and 2027", they added.
See also: Unbelievable what was discovered in a warehouse in Rotterdam! Nickel quotations suspended!
Indonesia and China will drive the nickel market
Indonesia is likely to be the biggest driver of refined nickel production growth.
"We forecast that Indonesia will account for approximately 50% of refined production growth over the next five years. Another driver of supply growth will be China, which we believe will account for around 40% of refined production growth over the next five years," - said analysts at HSBC
According to HSBC, there is a surplus in the nickel market, as strong supply growth outstrips demand growth.
"However, with the continued increase in demand from the electric vehicles, more supply may be required once current projects are completed. Nonetheless, we recognise the risks posed by changes in battery chemistry and the potential increase in secondary supply from recycled batteries, which could offset mine depletion in the longer term," - HSBC forecasters noted.
See also: The price of this metal was 70% higher than the price of gold, now it is 40% lower. What are the forecasts?
Nickel price forecast
ING's forecast is for nickel prices to rise to an average of USD 20 000 per tonne in 2024 and USD 23 000 in 2025.
"We forecast that nickel prices will remain under pressure in the short termas the surplus in the global market grows and the slowing global economy reduces demand for stainless steel. We anticipate prices to average (...) USD 20,000 per tonne in Q4 2023. However, declines will be limited due to the tight London Metal Exchange market." - stated commodity market analysts at ING.
"However, prices should remain elevated compared to average prices prior to the historic short squeeze in nickel prices on the London Metal Exchange due to nickel's role in the global energy transition. The metal's attractiveness to investors as a key 'green' metal will support price increases in the long term. In electric vehicle batteries, nickel increases their energy density and increases driving range," ING analysts noted.
Analysts at HSBC take a different view, according to them, in 2024, the price will average USD 19,800 and remain at this level in 2025.
In turn, commodity market experts from MUFG bank believe that In 2024 we will see prices lower than US$19,000 per tonne for nickel, and in 2025 we will see a rally to US$23,500.