Digging Deep: Nickel at a crossroads

By Dominic Jeff / July 23, 2019 / Article Link

Silvery white and lustrous, hard and ductile, nickel is a metal with many applications. Perhaps that is why it seems to be sitting at a crossroads as a commodity: perched between a potential boom as a key component for electric vehicle batteries and concerns over de-industrialisation and trade wars which affect its demand from the stainless-steel industry.

Right now, sentiment seems to be focusing on the positives again. Nickel prices climbed to a six-month high this week and, having added 24% since the start of the year, it is now 2019’s best performing metal. Last year was a different story, however, and the previous decade has been a very rocky ride for the metal.

Maybe that explains some investors’ reluctance to touch nickel or nickel mining stocks, when many analysts are extremely bullish on their prospects. The World Bank predicts that demand for nickel for batteries, including for electric vehicles, will grow strongly in the coming years. However, most of that growth is expected in the next decade, when EV’s really take off. In its latest forecast, the World Bank pencilled in just 2% growth for 2019. Given the rise so far, that seems pessimistic, but last year prices rose steadily for the first six months only to plunge 25% in H2.

While prices have been up and down, inventories have shown a steady decline in recent years. Commodities giant, Glencore, recently published predictions that stocks will fall further this year, even in the unlikely event that global decline for nickel eases. The group noted that 9% of global production has been shut down due to environmental concerns.

Roskill senior analyst Olivier Masson said recently: "Ultimately the nickel market has been in deficit for three years running and we are expecting another deficit this year.”


Roskill, however, says that owing to various changes which are hard to predict - including the EV revolution - the nickel market is going through a period of introspection and restructuring. “Major producers are likely to review their operations, looking to consolidate costs, or realign their operations to different markets,” the group, which is preparing a new outlook report on nickel, [ LINK https://roskill.com/market-report/nickel/ ] says.


“Much depends on the requirement for class 1 nickel, which is currently needed for batteries. Nickel sulphate is the key raw material for the nickel in lithium-ion batteries and producing this will require an increase in the supply of class I material. However, most of the growth in output in recent years has been in the form of NPI (nickel pig iron) for the Chinese - and now also for the Indonesian - stainless steel industry. One of the key issues for the nickel industry going forward will be how to supply the material that the battery industry will require.”


This points investors to stocks in miners who can source class 1 nickel in bulk.


Matthew Bohlsen, writing in Investor Intel in response to the recent rally,[LINK https://investorintel.com/market-analysis/market-analysis-intel/nickel-is-very-oversold-and-should-rally-in-2019-provided-a-significant-china-slowdown-does-not-occur/ ] said: “The key to understand here is that the nickel sulfide ore miners have a distinct cost advantage when producing the nickel sulfate required for EV batteries, and demand for class 1 (high purity) nickel is set to skyrocket.”


He pointed to predictions by research group McKinsey that a shortfall in class 1 nickel production seems increasingly likely as current low nickel prices do not support class 1 nickel capacity expansions and alternative strategies. McKinsey concluded that, as a result, not only will nickel prices need to move toward ” incentive pricing,” but the future pricing mechanism is likely to reflect two distinct nickel products: class 1 and class 2.

Junior miners and explorers, and even some large diversified miners, are scrambling to meet this expected boom in class 1 nickel specifically, the price of which could increasingly become detached from the raw material of the Asian steel industry.


Among the junior stocks targeting the potential boom in class 1 nickel in the next decade is Canada’s FPX Nickel Corp. (FPX-TSX.V). It highlighted the high quality of the deposits it is prospecting in its latest update, on the Baptiste Deposit at its 100%-owned Decar Nickel District in central British Columbia. 


The company's president and CEO, Martin Turenne, said: “The consistent production of concentrates grading from 55% to 72% nickel further establishes the potential for the Baptiste deposit to generate a clean nickel product with no sulphur and very high metal content.”


Given the exploratory nature of its activities, FPX would be well positioned to take advantage of soaring class 1 demand in the 2020s. However, those projections do make certain assumptions about electric cars.


Scott Tibballs of Investment News Network, [LINK https://investingnews.com/daily/resource-investing/base-metals-investing/nickel-investing/nickel-outlook-price-gains/ ] says the much-touted battery metal boom might well not happen in any meaningful way for nickel in the near term, as markets learn more about just how far the electric vehicle (EV) industry has to go, and how quickly consumers need to adopt new technology for the boom to materialize.


And, although, almost everyone expects that electric vehicles will eventually play a major role in transportation, battery technology is a rapidly developing area and major changes could yet occur. What if manufacturers find something better than the currently popular lithium-ion battery - which none other than Elon Musk suggested should really be called a nickel-graphite battery - and its manufacture does not require nickel at all?


Brian Leni, founder of juniorstockreview.com, acknowledges these possibilities but was bullish on the metal at the Vancouver Resource Investors’ Conference earlier this year.

 “The stainless steel makers and the battery makers have already started a proverbial tug of war for class 1 nickel, and this is causing the inventory drawdowns,” he said, noting that rocketing EV adoption rates could mean that by 2030, more than half of current global nickel production is needed to power the world’s cars.

Leni added: “Given the current and future chemistries used in EV batteries..nickel plays a major role. While I don't see this staying this way forever, I would say that the next 10 to 12 years of battery demand is very bullish for nickel.”

With steel production currently accounting for two thirds of global nickel demand, Leni wonders where the production is going to come from, especially in an environment where nickel prices have been supported of late by growing demand from China for stainless-steel production.

This makes for significant upside risks, but with such a volatile commodity, the buying case at any given time can be hard to make with certainty.

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