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Historic nickel debacle reveals EV revolution vulnerabilities Metal Tech News – March 16, 2022
Rising demand, tight supply, war, and a short squeeze sent the price for nickel rocketing to 250% to a peak of above US$100,000 per metric ton on March 7, forcing the London Metals Exchange to halt trading for more than a week.
Battery-electric vehicles such as this 2024 Chevrolet Silverado EV are driving explosive demand for cobalt, graphite, lithium, manganese, and nickel.
Rising demand, tight supply, war, and a short squeeze on a China-based stainless steel titan came into perfect alignment to rocket the price of nickel to historic heights.
The price for a pound of nickel soared nearly 250% over two days to a brief altitude above US$100,000 per metric ton, or US$45 per pound, on March 7. This prompted the London Metal Exchange to halt trading of the battery metal to deal with the aftermath of the largest move in the price of a metal in LME's 145-year history.
"Clearly these are unprecedented times and they have called for us to take action we would not wish to have taken," said London Metal Exchange CEO Matthew Chamberlain.
While the nickel market is expected to return to some sense of normalcy – at least as normal as can be expected in a market where tight supply-demand dynamics are spiced with anxiety over the sanctions on Russia, a major global supplier of the metal – this historic event should be considered a shot over the bow moment for everyone involved with and rooting for the electric vehicle revolution.
"When you look at the universe of critical battery raw materials, you have got lithium at all-time highs, you got cobalt at multi-year highs, and then you got nickel at all-time highs," Benchmark Mineral Intelligence Chief Data Officer Caspar Rawles told Metal Tech News.
"This is a warning on what could ultimately happen for automakers or cell manufacturers across the board with all of the materials expected to fall into deficit," the preeminent battery materials expert added.
Short fuse
Driven largely by the rapidly growing demands for lithium-ion batteries, the price of nickel had more than doubled over the past two years, from just above US$5.00/lb in early 2020 to more than $13.00/lb. This set the stage for last week's extraordinary two-day rally that launched nickel prices to above US$45/lb.
By March 8, when the LME closed trading, the price for a pound of nickel had settled to roughly US$21.87, where it has held over the past week as trading remains closed.
While already tight markets and anxiety over Russia's invasion of Ukraine created a powder keg for volatility, it was a large short nickel position held by Tsingshan Holding Group that ignited the explosive rise in nickel prices.
Tsingshan founder Xiang Guangda amassed an estimated 200,000-metric-ton (441 million pounds) short position in nickel, a bet that would have allowed the stainless steel titan to profit from a drop in the price of this increasingly critical alloying and battery metal.
Russia's invasion of Ukraine and resultant sanctions on the world's second largest nickel-producing country, however, pushed prices higher.
This forced Tsingshan to either close out its short and take losses estimated to be between US$3 billion and US$8 billion or deliver enough nickel to cover its position.
Unfortunately for Tsingshan, LME is not structured for a nickel market increasingly geared toward EV batteries.
Still aligned with the traditional drivers of the nickel market, stainless steel and other alloys, LME requires nickel that is 99.8% purity. Tsingshan's nickel matte, however, runs from 70% to 75% nickel purity.
"It can't deliver against the LME because of the confines of the exchange structure which is not geared for the EV revolution," Rawles explained. "Tsingshan's recent investments have been in battery nickel projects, but the exchange is rigid in requiring high-purity Class 1 metal."
It has been reported that Tsingshan has talked with Beijing about trading some of the lower grade nickel pig iron and matte produced by the company for China's high-grade nickel reserves that would meet LME standards.
During a "standstill agreement" reached on March 14, Tsingshan said it has reached an agreement with a consortium of unnamed banks for a secured lending package that includes a "provision for the existing hedge positions to be reduced by Tsingshan in a fair and orderly manner as abnormal market conditions subside."
With this agreement in place, the LME is set to resume trading on March 16.
The more than a week-long shutdown highlights the fact that the London exchange is not accustomed to dealing with the enormous compound annual growth rate that is expected for battery metals.
"They are very good at markets that are growing 5% per year or a bit more than that but when you have sudden changes in demand, which for the battery supply chain is upwards of 20% CAGR for the next decade, it becomes challenging for the exchange structure to deal with that kind of growth rates," Rawles said.
Warning shot
While the vertical price charts for nickel and the intrigue surrounding LME's weeklong suspension of trading the battery metal has captured the headlines over the past week, this event is likely a warning shot for global markets and industries that are adjusting to the nearly unfathomable amounts of minerals and metals that need to be fed into supply chains as the world makes a sudden shift from fossil-fueled transportation and energy to EVs charged with low-carbon electricity.
Given the colossal size of the automotive market and the aggressive industry and government push to transition as many drivers to EVs as soon as possible, electric mobility is expected to be the biggest driver of new demand for critical minerals in the coming two decades.
While on the surface, electric cars and trucks are built with the same steel, aluminum, polymers, and other materials as their internal combustion engine counterparts, the batteries that power and the motors that drive them require mined materials that were not previously used at the massive scale needed for the electric mobility transition.
Lithium-ion batteries, which are the EV equivalent to an ICE gas tank, are driving massive new demand for lithium, cobalt, graphite, and nickel.
According to a 2021 International Energy Agency report, "The Role of Critical Minerals in Clean Energy Transitions," the annual supplies of minerals and metals being fed into the burgeoning EV and battery storage sectors are expected to expand by 30-fold by 2040.
In a scenario where global governments and industries achieve the 2-degree Celsius temperature increase limit outlined in the 2015 Paris Agreement, the clean energy demand for lithium is expected to rocket 40-fold, and graphite, cobalt, and nickel demand is expected to surge by upwards of 25 times.
As a result of this new mainstream demand, prices for these previously niche metals have skyrocketed over the past decade.
Lithium, for example, has rocketed from US$7 per kilogram (US$3.18/lb) early in 2020 to nearly US$70/kg ($31.80/lb).
Rawles says this 10-fold price increase is "a function of supply and demand and a lack of investment into the supply chain."
This lack of investment into the mines that will feed battery materials into the supply chain means that markets will likely remain tight as mining companies try to keep pace with the increasingly ambitious e-mobility targets announced by governments and automakers.
Global passenger EV sales forecast to grow by nearly 20-fold over the next two decades, from 3 million during 2020 to nearly 60 million per year by 2040.
Permitting and development of the mining projects that will supply the battery materials required, however, is measured in geological time scales.
"It takes a minimum of five years and generally longer," Rawles told Metal Tech News.
The battery metals expert says streamlining the permitting process is one of the ways that governments can help get mining projects into production quicker.
In addition to helping ensure that EV adoption goals are not held back by battery materials supply constraints, more metals fed into the supply chain will help ensure that the price of these critically important battery ingredients do not go so high that most consumers cannot afford the electric cars and trucks that are expected to play a crucial role in meeting global climate goals.
Even with all hands on deck, governments, automakers, mining companies, and metal exchanges should expect that battery materials market volatility will continue until mining projects can ramp up to meet demand and the first generations of EVs are recycled back into global supply chains.
UPDATE Feb. 16, 2022: The London Metal Exchange froze electronic nickel trading immediately after this morning’s reopening. The reason for the close is related to a “glitch” associated with a 5% daily price trade limit established by the LME. Almost immediately after opening, nickel futures fell through the limit. Phone-based and open-outcry trading on the LME floor remained open. Nickel dropped to US$20.68/lb (45,590 per metric ton) before the LME electronic trading halt.
With more than 17 years of covering mining, Shane is renowned for his insights and in-depth analysis of mining, mineral exploration, and technology metals.
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