The great nickel trade war

The West is losing (disastrously)

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Nickel is at the centre of a global trade war over market share, with Indonesia forcing the price down by 50% since the recent peak in December 2022 to take out Western competitors.

At the moment, the West is losing the war (disastrously), but Indonesia and Chinese companies are also fighting to stop a pyrrhic victory.

Indonesia

At the centre of the new nickel trade war is Indonesia and its industrial policy.

Indonesia is the world’s largest nickel producer and is forecast to represent more than 70% of global supply in the next 5 years.

The reason nickel prices have fallen so dramatically is because Indonesia has flooded the market to protect market share. There are two main reasons for this:

• take out global competitors

• reduce cost of nickel for electric battery and vehicle manufacturers

Indonesia officials warn they do not need to see prices rise significantly above US$18,000 per metric ton in the long-term. The full statement is worth reading in full:

“This concept has to be well understood by all these nickel producers elsewhere. The purpose for the government is to find an equilibrium so that nickel demand, especially for [electric vehicles] EVs, is well supplied… We know what happened with cobalt three, four years ago. You have to make sure everyone in the ecosystem has a good profitability, not an excessive one.”

— Septian Hario Seto, Indonesia’s Deputy Minister of the Coordinating Ministry for Maritime & Investment Affairs

Indonesia’s policy has been to leverage their nickel assets to dominate the industry.

For example, in 2020, the government banned raw nickel ore exports but allowed the export of refined nickel products, to boost investment in processing plants by forcing companies to process and manufacture in the country — and the plan worked. By July 2023, there were 43 nickel smelting facilities in operation in the country, 28 under construction, and 24 more being planned in the country. Exports of nickel products were worth an estimated US$30 billion in 2021, an increase of almost x10 from 2013.

The government is now working to onshore an integrated nickel to EV supply chain by 2027, by encouraging electric battery and electric vehicle (EV) factories to be built in the country through export bans and government support. For example:

• China automaker BYD plans to invest US$1.3 billion to build an elec manufacturing plant with a capacity of 150,000 units/year

• Vietnam automaker VinFast plans a longterm investment of US1.2 billion for a fully-integrated EV and battery site

• Hyundai opened a new plant, with a US$1.55 billion investment, to produce Indonesia’s first locally assembled electric vehicle this year

• as well as reports of possible agreements over a US$1.8 billion investment by Toyota and US$4.7 billion by Volkswagen

None of the above would be possible without the demand for nickel in electric batteries, forecast increase x41 by 2040.

However, the share of nickel in electric batteries has been steadily falling as Chinese battery manufacturers have increasingly switched their battery chemistries from nickel-manganese-cobalt-oxide (NMC) to lithium-iron-phosphate (LFP).

And it is also this trend that Indonesia wants to stop.

China

Cheap nickel from Indonesia helps China in two main respects:

• cheaper critical minerals for their EV production

• disrupting the West’s strategy to establish critical mineral supply chains, independent of China

China has invested an estimated US$30 billion in Indonesia’s nickel industry since 2020, helping to develop everything from the mines to the smelters, including technological efficiencies to convert class-2 material into battery-grade nickel. And, in 2023, China pledged more than US$65 billion of investment into Indonesia to strengthen the countries’ economic and political ties.

Cheap nickel from Indonesia is critical to China’s own industrial strategy to dominate the world's electric vehicle, battery and renewable energy markets (eg approx 2 tons of nickel are needed for every wind turbine)

“Chinese EV makers are sitting on enough capacity to supply 75% of global EV demand. That should keep western automakers awake at night”

— Michael Dunne, chief executive of Asia-focused car consultancy Dunne Insights told the Financial Times

China and Indonesia also dominate the supply of processed nickel, representing nearly 70% of supply. They do not want this position put at risk by attempts by the West to secure their own supply chains.

The West

The US, Australia, Canada and France in New Caledonia all have a significant stake in global nickel production — nickel production in Australia and New Caledonia accounts for approximately 13% of global supply — that is being severely undermined by the current low prices.

In the past year, the list of nickel mines closing is increasingly long, with at least six mines closing in Australia by February 2024, for example:

• Glencore is suspending production at its Koniambo Nickel SAS (KNS) mine in New Caledonia and plans to sell its stake

• Canadian miner, Quantum Minerals, has halted mining at its Raventhorpe mine in Australia for at least 2 years

• Avebury Nickel Mine is to be put into care-and-maintenance just 17 months after opening

• Anglo American booked a write-down of $800mn for its Barro Alto nickel mine in Brazil

• BHP is considering closing its Western Australia Nickel operations, putting Nickel West into care-and-maintenance 

• Wyloo Metals will close its Australian Cassini and Northern Operations nickel mines from May

• operations at Savannah nickel mine in Western Australia have been halted

• Avebury nickel mine in Tasmania is set to close, just two years after reopening

The nickel mine closures come just as the West has unrolled its strategy to secure critical mineral supply chains: an international network of free trade agreements, from Australia to Canada, that give critical mineral producers access to tax credits and US federal financing (through trillion-dollar programs such as the Inflation Reduction Act (IRA)) to supply US EV auto-manufacturers, defence contractors, etc

“If we see a lot of non-Indonesia projects go to the wall, then Indonesia’s share goes even higher. At the moment, there is no alternative. There is no big source being developed or approved elsewhere”

— according to Jim Lennon, commodity strategy consultant at Macquarie Bank

According to estimates by Macquarie’s veteran nickel analyst, Jim Lennon, the vast majority of Indonesia’s 2.3 million tons per year of nickel (as well as the 1.4 million tons per year capacity under construction) are not eligible for US tax credits, as they have a 25% stake by a Chinese-owned company.

As we warned in our recent newsletter — America's current critical mineral strategy threatens disaster — this strategy risks shutting out supply just as competitors flood the market to make new investment in mineral production uneconomic.

And, to make matters worse, US automaker Ford has signed an agreement with an Indonesian unit of nickel miner Vale and China’s Zhejiang Huayou Cobalt to partner in a US$4.5 billion HPAL plant in Indonesia to secure access to nickel. US senators have called for an investigation into Ford’s plan, but so far it is still going ahead.

The US and Indonesia were in talks on a potential critical minerals trade partnership to secure supply chains between the two countries, with Indonesia requesting a limited free trade deal.

However, as we warned in our “Will the US and Indonesia sign a free trade deal?” analysis, a free trade deal is very unlikely.

“Indonesia now has three plants capable of producing 164,000 metric tons/year of Mixed Hydroxide Precipitate (MHP), a nickel intermediate suitable for battery production, and over 25 more such plants have been proposed. All but three involve PRC companies”

— The Honorable Katherine Tai, Concerns Regarding a Potential Critical Minerals Trade Agreement

The reaction from the West to shore up its disintegrating position includes two main moves:

• Australia has lobbied, with US support, the London Metal Exchange (LME) to divide its nickel contract into “clean” and “dirty”.
  
  As we have highlighted on The Oregon Group, the environmental challenge of mining nickel in Indonesia and processing it in China offers an opportunity for the West.
  
  Concerns over deforestation and high-pressure acid leaching (HPAL) processing that uses sulfuric acid to recover the nickel creates a muddy high moisture content waste, called tailings. In 2021, Indonesia banned deep-sea tailings disposal due to its environmental dangers, but there are concerns over the “dry-stacking" of tailings in a region with such a wet climate.
  
  Miners in the West argue the mining and processing is environmentally “cleaner” but more expensive to produce, and should therefore be charged at a premium.
  
  The LME has rejected a bid by the Australian government to recognise “clean” nickel, however Australia's Federal Resources Minister has suggested they have not given up:
  
  "LME is not the only exchange. We are supportive of transparency as well as competition and I think it won’t necessarily be long before one of the exchanges around the world does see the value in setting up a different market for nickel, and they’ll have their first mover advantage” — Madeleine King, Australia Federal Resources Minister

• new financing projects to support nickel in the West include:

  • Australia has designated nickel as a critical mineral, so miners can access financing from the country’s US$2.6billion Critical Mineral Facility and other grants

  • talks between the Pentagon and Australia's Federal Resources over new financing, similar to what Japan did with Rare Earths in 2020

"The options around collaboration of government financing agencies with those out of America might be EXIM [Export-Import Bank], or under the Defence Production Act"

— Madeleine King, Australia Federal Resources Minister

But, for now, the mines are still closing.

Russia

Russia, the third largest nickel producer in the world, is facing its own front in the global trade war on nickel: the war in Ukraine and sanctions.

Although nickel exports from Russia, accounting for approximately 9% of global supply, have been directly sanctioned, they have been impacted indirectly.

• US import tariffs on nickel from Russia will be subject to a 35% duty from April, 2024, and, according to US import data, the country has not imported any Russian aluminium since March 2023

• in 2022, the UK imposed a 35% tariff on nickel imports from Russia

• and, although the EU has not agreed any sanctions, imports of nickel into the EU have also dropped, from 49% of the EU’s nickel imports in 2021 to 24% in Q4 2023

This is significant, as we warned in our analysis — “Nickel supply has a Russia problem” — as the country exerts a disproportionate influence on the market. The reason, Russia supplies approximately 20% of the world’s Class I nickel, essential for electric batteries and LME deliverable, which has a 99.8% purity.

Now Russia's Nornickel, a major producer of refined nickel, said its nickel production fell 5% year on year to 209,000 metric tons in 2023, and expects nickel output to fall to 184,000-194,000 tons this year.

Pyrrhic victory?

There are two significant risks to the strategy currently supported by Indonesia and China that may highlight the limits of the trade war:

• low prices are a cure for low prices

• the West sticks to its strategy over the long-term and slowly detaches its supply chains

There is a risk that low prices will mean falling investment in Indonesia as well. And according to a report by FastMarkets, this is already happening:

• Nanjing Hanrui Cobalt has halted its new HPAL project, with a projected capacity of 60,000 tons, citing shrinking economic value amid unfavorable market conditions — " the market has already been tipped into a structural surplus”

• sources report Huayou’s Huashan nickel-cobalt project with an annual output of 120,000 tonnes of nickel content is also on hold

“The already-started projects are still on the cards, but companies with cash flow issues might have to shelve plans,” a producer source told FastMarkets.

A senior nickel executive in Indonesia told the Financial Times that profit margins are increasingly smaller for local producers, but because of low costs they are hopeful of surviving the downturn longer than their competitors.

"We're worried that if it [the nickel price] falls below 15,000, we'll be in real trouble, unable to cover our production expenses. Right now, many APNI members are only producing to break even"

— Meidy Katrin Lengkey, the Secretary-General of the Indonesian Nickel Miners Association (APNI), told the Jakarta Globe

So, have Indonesia and China reached the limits of their oversupply strategy?

If so, this would help the West take stock of the situation and start to take the initiative by calculating how much they need to invest to stabilise and secure their supply chains.

Indonesia by itself would currently struggle to meet the expected demand for nickel if the global economy rebounds and the energy transition charges ahead. And, if the market corrects too far with the closure of mines in Australia and elsewhere, then supply could tighten significantly and sharply, undermining their strategy to keep nickel affordable for electric batteries.

Few analysts think the nickel price will bounce back anytime soon, but there are signs this process may already be underway.

Macquarie’s Jim Lennon’s nickel forecasts have undergone a “major change” — with a nickel surplus cut from more than 100,000 tonnes to less than 40,000 tonnes in 2024 — after a recent visit to China where he observed Chinese stainless-steel makers and other users of nickel alloys were boosting their output more than almost anyone had realised.

“That means that, moving forward, the market can correct a lot more quickly. It’s not as if there’s a mountain of inventory that’s got to be worked off before you get back into a balanced market”

— according to Jim Lennon, commodity strategy consultant at Macquarie Bank

Conclusion

The global nickel industry is in turmoil — and that means volatility.

And this volatility spreads across, not just price, but geopolitical alliances. 

If, for example, the West does not secure its nickel supply chains, more Western automakers may look to make deals with Chinese companies in Indonesia to secure supply despite threats by US legislators. Or, there is the possibility of Indonesia (whose priorities are different from China) being pulled into the US sphere of influence through a trade deal (Western companies, like Tesla, are already looking for alternatives to nickel electric batteries, the opposite of Indonesia’s ambitions)

Whatever happens, Indonesia is set to solidify its dominant position over nickel supply in the next decade.

However, we have caught a glimpse of how low Indonesia is willing to drive the nickel price: low enough to keep nickel viable for the electric vehicle market and to price out international competitors — but not so low that their own industry starts to become unprofitable — after all, nickel underpins the country’s own plans to grow the economy.

Prices may fall further but, we believe, not for an extended period, especially for a country that has grown accustomed to a significant windfall from high prices over the past decade.

If — and it’s a big if — the West is able to support some of its mining capacity, they will be able to salvage some of the industry with more efficient and resilient supply chains, not to a victory, but from a complete rout where the West is even more dependent on the very supply chains they want to diversify from.

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