Nickel Price Cools As Traders Look To Chinese Demand, Supply Side Changes

Like most of the base metals, nickel has been on a tear since the middle of the year. But over the last few weeks, its price has come off the boil. After putting in what was likely a near term top above $13,000 USD/tonne, prices have slipped back below $12,000 USD/tonne. There are a number of explanations for this retrenchment banging around the market, with adequate supply being cited as a major source of price weakness at the moment.

Nickel prices had a rough couple of years, and there may also be some psychological hangover from the long term price declines that have plagued the market. Traders are looking at the Chinese steel market for clues to the immediate demand picture for existing stocks of nickel, and some have expressed concerns that there may not be a significant draw down in those stocks until after Chinese Lunar New Year, which would mean March of next year.

The Electric Vehicle (EV) narrative has probably been responsible for a lot of the strength in nickel's price, but for now, that is a potential demand that may materialize over the next few years. For the moment steel is the driving force in the nickel market, though this kind of short term thinking may end up having some serious consequences down the road.

Planning For The Future

Mining elements like nickel is a major undertaking. The amount of supply that has gone off-line over the last decade should be evidence of how difficult it is to maintain nickel mining operations in a soft market. Major mining companies like BHP and Glencore were forced to shutter huge nickel developments in the wake of 2008's collapse in price, and in same cases, projects like Cosmos in Western Australia are still sitting idle.

Glencore sold Cosmos to Western Areas, who is now looking at reopening the project, but the time between the mine's closure and today saw huge amounts of money lost by the former owner. While most metals are traded in real time, the production side is a far slower business.

Even in good times a big mining operation takes a lot of work to get up and running, but after the difficult period that the mining industry just endured, there may be some reluctance to add supply to a market that is having a hard time deciding which way to go with prices. Nickel traders also saw latent supply coming back online, but this isn't straight forward at all.

Iffy Situation

When base metals prices cratered over the last few years, and access to capital dried up, many sources of metal that remained in the marketplace were in areas that aren't as stable.

The recent production stoppages in the Philippines and Indonesia serve to demonstrate this point, and act as a warning to base metals buyers going forward. Both Asian nations have limited the export of nickel for differing reasons over the last few years, and while Indonesian nickel is returning to the market, production in the Philippines is looking at an 11% decline for 2017.

What should be obvious in this situation is that low cost producers of base metals aren't necessarily going to be reliable, and when a supply crunch hits, they may use the tightness in the market to take advantage of buyers. Goldman Sachs has called this dynamic a “Wall of Supply”, and as the world uses more advanced batteries, the need for metals like nickel and copper will only become more important.

Analysts at Wood Mackenzie see EV's adding around 220,000 tonnes of new demand for nickel to the market by 2025, which represents a bit more that 10% of the current 2 million tons of annual nickel consumption. But what may be overlooked is the knock-on demand that the EV market is creating in other areas, like the massive 100 Mw battery array Elon Musk's Tesla recently brought online in South Australia.

This battery pack is the largest of its kind ever produced, and it took just under 70 days to build. As the world moves towards new electrical generation technologies like solar and wind, countries will need to use battery based systems in order to fill in the gaps from the intermittent power that renewable energy sources create.

A Global Issue

Making sure that new companies like Tesla have access to the materials they need is vital for the future of technology. When vital elements like nickel, copper, zinc and cobalt are mined in unstable areas, the entire supply chain is put at risk. While there are still some supplies of nickel sitting at LME warehouses, if batteries become a part of the electrical infrastructure that is supplanting existing generating technology, there really is no telling where the demand side could end up.

Going forward, securing reliable supplies of strategic elements will become more important, as will making sure they are in countries that have a history of enforcing laws, not changing them when the price of a commodity shoots up.

The upcoming Vancouver Resource Investment Conference (VRIC) will feature some of the biggest names in resource investing, as well as more than 200 companies that focus on responsible mining for the next generation of human advancement. It will all happen on January 21^st, at the Vancouver Convention Center West, right in downtown Vancouver.