After enjoying a strong 2017, nickel has continued to power higher this year, reaching its highest price in two-and-a-half years earlier this month following concerns that sanctions could hit a major Russian supplier. Aside from the positive impact that supply concerns and the steady growth in stainless steel demand have had on its prices, nickel is piquing the interest of investors due to its increasing use in electric vehicle (EV) batteries. With analysts pointing towards a massive jump in the global use of EVs going forward, we have taken a look at the wider nickel market to see if prices will continue to rise and, if so, whether AIM investors can get exposure.
A diversely used metal
Nickel is a naturally-occurring metallic element widely used in hundreds of thousands of products. It has an extremely high melting point and is resistant to corrosion and oxidation. As a result of its properties, Nickel’s most significant use is in creating alloys used for pots and pans, kitchen sinks, buildings, food processing equipment, medical equipment and chemical plants. Indeed, stainless steel currently accounts for around 70pc of all nickel production.
According to the Nickel Institute, estimates currently put world nickel resources at almost 300 million tonnes, contained in laterite deposits and sulphide-type deposits. Lower-quality laterite deposits are used in stainless steel production and account for 62.4pc of the nickel market. Sulphide-type deposits account for the remainder of the market and are much more refined.
Nickel-containing ores are currently mined in more than 25 countries worldwide, with production led by Indonesia, the Philippines, Russia, Australia, and Canada. China is by far the biggest user of the metal due to its sizeable stainless-steel industry. In 2016, China accounted for more than 55pc of global nickel consumption with Europe and the US also using large amounts.
Global Nickel output
After struggling to gain momentum following a bear market between 2014-2016, nickel prices enjoyed a significant rally last year thanks to a healthy supply/demand dynamic. Prices rose from $9624/t to $12,762/t over the year.
On the demand side, nickel was boosted by the stainless-steel market, which is currently growing at around 6pc a year as rapidly industrialising countries require increasing amounts of the alloy to modernise infrastructure. This growth led China, which accounts for around half of the world’s stainless-steel production, to increase nickel consumption by 3.8pc to 1.1m tonnes last year.
On the supply side, nickel was buoyed by concerns that a three-year-long shortfall was set to worsen. The panic was prompted by the closure of 26 mines in the Philippines, the top exporter of laterite nickel ore to China, as part of an environmental crackdown by former environment secretary Gina Lopez. Indonesia’s decision in early 2014 to ban entirely nickel ore shipments also constrained availability, although this has now eased.
This year has seen prices shoot up even further as supply concerns have moved into the nickel sulphide market. Earlier this month, nickel prices jumped by 10pc in the metal’s biggest one-day move since 2008 to a high of $15,875 a tonne on fears that an extension of Russian sanctions could hit producer Norilsk Nickel. Russia accounts for a large percentage of nickel sulphide production. Although the US Treasury’s initial list of sanctions did not include Norlisk, traders lost their nerve after the London Metal Exchange said it had delisted two brands of the company’s nickel. These fears turned out to be unfounded, but the edginess persists. In a recent note, Commonwealth Bank of Australia analyst Vivek Dhar said:
‘Unlike aluminium, which saw explicit sanctions against Rusal, there have been no explicit sanctions against nickel producers. However, markets are still concerned Norilsk Nickel, which is linked with both Rusal and sanctioned oligarch Oleg Deripaska, could eventually face sanctions.’
Nickel usage in Electric Vehicle Batteries
The most discussed and exciting force in the current nickel market is the potential for electric vehicles (EVs) to drive much larger demand. Carmakers are currently pouring money into the development of powerful EV batteries that contain up to 80pc nickel. According to Porsche, the ratio of nickel to cobalt and manganese in a typical battery is expected to rise eight-fold as EVs enter the mainstream.
As it stands, the use of nickel in batteries makes up just 3pc of the global market for the metal. However, analyst Wood Mackenzie expects nickel usage in EV batteries to rise from between 60,000-80,000 tonnes this year to 220,000 tonnes in 2025. Likewise, UBS estimates that 15m electric vehicles will be on the road by 2025, lifting nickel demand by 300,000-900,000 tonnes, or 10-40pc of the current market. It adds: ‘We think that electric vehicles could offer a renaissance for the nickel market’.
So, will prices continue to rise?
As we go forward, nickel laterite supply is like to improve if Indonesia continues to take a less severe approach to its ban and the Philippines re-evaluates its decision to close its mines, as it is expected to. Supply headwinds are likely to remain a concern for nickel sulphides as long as geopolitical worries around Russia persist.
On the demand side, the global stainless-steel market is currently growing at around 6pc a year, providing strong underlying demand for nickel. All told, Wood Mackenzie forecasts a nickel supply deficit of 80,000-90,000 tonnes this year- similar to that seen last year – setting the scene for a gradual rise in prices moving forward.
The real kicker for nickel prices will come if EVs can actually penetrate the global automotive market. After all, all the positive talk of the effect of EVs on nickel prices is currently just speculation, with EVs accounting for just 1pc of the global car market.
Cairn Energy Research Advisors have said that 6pc EV penetration by 2025 could translate to an extra 97,000 tonnes of nickel demand. Moving beyond this, UBS has said that in a hypothetical scenario where EVs penetrate 100pc of the market, global nickel demand would more than double. The domination of EVs is some way away, but with the UK, France, Norway, and China all pledging to make a complete move to zero-emission vehicles in the coming decades, it is by no means pie-in-the-sky.
The exciting point for many mining businesses is that EVs cannot even use most of the world’s nickel supply. Indeed, nickel sulphate, the compound mainly used to manufacture batteries, makes up less than 10pc of global supply. At current levels of production, there is likely to be a significant deficit in nickel sulphide production if EV demand soars in line with the previously mentioned estimates. The gap could both hike nickel prices and create a unique market specifically for nickel sulphate production and processing capacity,
The larger miners are making the most of this opportunity, with BHP Billiton announcing a $43.2m investment to create the world’s biggest nickel sulphate plant in August last year. However, the optimism is also filtering through to smaller players on AIM.
Peter Heinrich Muller, chief operating officer at Jangada Mines (LSE:JAN), told us nickel is one of the key revenue drivers underpinning the firm’s Pedra Branca PGM project. Pedra Branca is the largest PGM project in South America, with substantial nickel credits. He added:
‘The global nickel market is in a sustained deficit driven by healthy demand growth in stainless steel and anticipated growth from the battery market. The current price is still 30pc below the 10-year historical mean. Mined commodities are essential ingredients in sustaining our modern world and the recovery of metal prices in recent months reflect this. Nickel and palladium are leaders of the pack.’
Likewise, Andrew Bell, chairman of Regency Mines (LSE:RGM), told us that with robust stainless-steel demand remaining in place, battery demand could significantly boost nickel prices. Regency owns a stake in a lateritic nickel-cobalt project in Papua New Guinea. He said:
‘The basic uses for nickel like stainless steel are still there, and in fact, are seeing some recovery. So in a market where there hasn’t been investment in production for some years, you are actually getting an improvement in normal demand which would lift prices anyway while on top of that you are suddenly starting to see the percentage of nickel used in electric car batteries rapidly start to grow and become significant.’
‘Eventually, electric vehicles may become a majority of nickel production. Where is that going to come from? Now that the production lines for more nickel heavy batteries have been set up, that demand is more or less going to remain a constant for the next five years.
‘Over the next two or three years, nickel could start to perform like lithium and cobalt, which have both been boosted by battery technology. Lithium and cobalt prices were driven by battery demand very quickly because their other uses were quite small. However, nickel prices are taking time to react to battery usage because its other uses are greater. Once the breakout happens, it could happen very quickly. If someone has a good nickel deposit, then this cycle will be the opportunity to use it.’
Jeremy Martin, chief executive of Horizonte Minerals (LSE:HZM), agreed that the combination of growth in stainless demand and the battery market could boost prices. Horizonte is a pure play nickel company with two tier one assets that can supply both ferronickel to the stainless-steel market and a potential battery product for the EV sector. He said:
‘Continuous forecast growth in the stainless-steel market will provide robust underlying future demand. Moreover, adoption of electric vehicles and energy storage present a very exciting new market and catalyst for future nickel demand. Nickel mining companies are well positioned to benefit from these dynamics, particularly those such as Horizonte Minerals.’
However, not everybody is convinced. Sheldon Modeland, an analyst at Stockdale Securities, told us he is not confident that nickel prices will continue to rise in the long-term:
‘If the EV market takes off there will be a deficit and the price will go up. However, until that potential market is realised, I would be on the fence. Sure, the price has doubled over the last couple of years, but that is likely just the hype from the EV. I am not convinced yet and will be cautious until I start to see the production of these Tesla vehicles.’
Like many other metals, nickel prices are benefitting from supply fears and a rise in demand in the wake of the commodity downturn earlier this decade. Unlike many other metals, however, a potentially massive emerging battery market could soon lead to a genuinely game-changing lift in the metal’s price.
Whether or not you want to invest in nickel fundamentally comes down to whether you believe EVs are going to take off – the environmental commitments made by several large countries are no doubt promising. Many will want to wait and see, but if you are one of the converted, then it is clear that there are exciting ways to get exposure on AIM. Furthermore, with new battery metal-focused businesses seemingly coming to the market every week, your opportunity set only looks set to expand.