Nickel market will be broken even if LME’s fixed

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HERE’S one remarkable aspect of the short squeeze that briefly drove nickel prices to nearly quadruple in 48 hours earlier this month: The player who was squeezed to the point of making billions of paper losses each day is the world’s biggest producer of nickel, Tsingshan Holding Group Co Ltd.

Such an outcome is a bit like Exxon Mobil Co getting caught on the wrong side of the oil market. A short squeeze only works on a trader who’s unable to cover their position, forcing them to buy back contracts at ever-escalating prices in a market where supply is vanishing.

Tsingshan should be immune from that problem. The company aims to produce 850,000 metric tonnes of nickel this year.

Short interest across the entire London Metal Exchange (LME) on the eve of the squeeze amounted to not much more than half that amount.

If Tsingshan’s billionaire owner Xiang Guangda wanted to avoid those disastrous costs, he simply needed to deliver nickel from his plants in Indonesia into the LME’s warehouses in Singapore and Malaysia.

That’s the theory, at least. The problem is that not all nickel is created equal. Tsingshan made its name producing not the highly purified plates and briquettes which are traded on the LME as Class 1 nickel, but nickel pig iron or NPI — lumps of low-grade metal that can be fed into electric furnaces as a low-cost way of producing stainless steel, the destination of about three-quarters of the world’s nickel.

That helps explain why Tsingshan was unable to cover its trading position. While it produces plenty of nickel, hardly any of it is the high-grade sort that’s accepted by the LME.

That’s a problem that reaches well beyond this month’s trading turmoil. A few decades ago, Class 1 metal was overwhelmingly the most useful way of getting nickel into steel, alloys, electroplating and the array of other minor applications in which it’s used.

But refining a metal from ore up to 99.8% purity before alloying it down to lower concentrations can be a wasteful and cumbersome way of going about things.

After nickel last spiked to US$51,600 (RM217,571) a tonne in 2007, Chinese metallurgists turned to NPI, which has similar concentrations of elements to finished stainless steel, as a cheap but emissions-intensive way of churning out finished metal.

That revolutionised the nickel market during the 2010s, leading to an explosion in production from Indonesia and the Philippines, whose low-grade ores aren’t well-suited for refining into Class 1 metal.

The same process is now underway with battery materials. Nickel 28 Capital Corp forecasts that demand from electric cars, barely worth counting a few years ago, will rise to about 1.3 million tonnes in 2030, equivalent to about half of last year’s output.

Miners and battery companies are again looking to bypass Class 1 metal: BHP Group Ltd is producing nickel sulfate crystals from its mines in Australia, while Tsingshan and other Chinese companies have developed mixed hydroxide precipitate or MHP, a product rich in the battery elements nickel and cobalt.

What’s the role for Class 1 nickel in a world where its two largest end-use markets are supplied by alternative products?

It’s not zero: Because of its high purity, Class 1 can operate as a sort of swing product, with the versatility to make up for shortages in the stainless steel and battery materials market when NPI and MHP aren’t available in sufficient quantities.

Its uniformity makes trading alternative products easier, too. NPI and MHP are typically priced at a discount to the refined metal, adjusted based on their chemical composition, ease of processing and transport costs.

That’s not an unusual situation. Most of the world’s crude oil is not the light, sweet type on which the Brent and West Texas Intermediate contracts are based. Most metal is traded not as refined cathodes and briquettes, but as powdery concentrates and mattes that are almost as diverse as the rocks from which they’re processed.

Still, benchmarks that don’t reflect their market quickly lose their usefulness. Within the span of a few decades, Class 1 nickel has fallen from roughly two-thirds of the world’s mined nickel by value to a third or so.

That number will fall further as battery compounds take up an ever-larger share of demand.

Producers and consumers of metal won’t want their cashflows to be hostage to the gyrations of an illiquid commodity they barely even trade.

Fixing that problem won’t be easy. Class 1 nickel may be illiquid, but the less refined products that might challenge its role as a benchmark aren’t traded in volumes significant enough to supplant it, especially when you consider the disadvantages of their less standardised nature.

Nickel is unlikely to see turmoil as dramatic as its recent run to US$100,000 a tonne any time soon — but if producers and consumers can’t agree a more reliable yardstick for pricing, this won’t be the last upset to hit the market. — Bloomberg


This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.