What’s driving nickel’s wild rally these days?
15:00, 8 March 2022
Nickel had the best daily performance ever recorded in commodity markets, rising 70% in a day and doubling in two days, prompting the London Metal Exchange (LME) to halt trading in nickel on Tuesday 8 March as prices doubled to more than $100,000 per tonne.
Nickel futures surged over 65% to approximately $80,025 per tonne, having briefly climbed over $100,000 per tonne, in a new record.
The LME move was further fuelled by concerns over the Russia-Ukraine conflict worsening an already-frayed supply chain. Given that Russia is the fourth-largest nickel producer in the world, this therefore greatly threatens supply, particularly with Russia facing increasing Western sanctions.
In 2021, Russia provided approximately 9% of the total global amount of nickel. The mineral is used primarily in the creation of electric vehicle (EV) batteries and in armour-plating, as well as in stainless-steel manufacture.
However, even before the present Russia–Ukraine conflict, nickel prices were already well on the rise as demand increased from the stainless-steel and battery industries.
Along with chromium, nickel is a key alloy used by around two-thirds of the stainless-steel industry, therefore any shift in demand from the industry greatly affects its prices.
The recent surge in demand has caused nickel reserves to deplete unexpectedly rapidly, leading to LME-registered warehouse inventories dropping to approximately 76,830 tonnes – the lowest amount since 2019.
Nickel production by country chart – Credit: Capital.com/ Source: NS EnergyNickel price performance
At the start of the coronavirus pandemic, nickel took a sharp downswing, hitting approximately $10,680 per tonne by mid-March 2020 – the lowest point since 1 January 2019.
This was largely due to demand from the steel industry cooling off as a number of steel mills were working on stock-piled supplies, with long delays in receiving new supplies due to supply-chain constraints caused by the pandemic.
The boost in demand from the electric vehicle (EV) industry that had been expected for 2020 had also experienced significantly slower growth. Chinese auto sales data highlighted a dip in EV sales of approximately 72.5% year-on-year in February 2020.
Manufacturing data for this sector also pointed towards a dip of around 82.9% over the same period.
Nickel stocks had also almost doubled from the beginning of January 2020 to March 2020, coming in at around 231,489 tonnes at LME-registered warehouses in the middle of March 2020. This caused further downward price pressure on nickel.
By the end of December 2020, nickel had recovered somewhat to reach approximately $16,525.90 per tonne, which further increased to $18,141.92 by mid-January 2021. The price hit a peak of $19,594.89 by mid-February 2021.
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A big crash followed by an even-bigger rally
However, a mere two weeks later, by 1 March 2021, the metal had a sharp crash, hitting approximately $16,305.76 before bottoming out shortly afterwards at $15,940.57. This was largely due to a Chinese steel company announcing plans to increase battery-grade nickel production.
While EV makers such as Tesla (TSLA) had initially rejoiced at this unexpected fall, there were soon speculations of nickel-processing technology not being as green or environmentally sustainable as previously anticipated.
Nickel soon bounced back, however, and by the beginning of May 2021, it was trading close to $18,000 per tonne, going up to approximately $19,646.59 by the beginning of August 2021 and peaking at around $20,372.73 a month later.
By this time, the commodity rally that occurred during the later stages of the pandemic was already well on its way, and nickel was riding the wave. By mid-December 2021, nickel had dipped slightly to $19,632.18, however, a month later, by mid-January 2022, the metal had surged back to new heights, at around $24,109,72.
This upswing continued into February, on fears of tightening supplies, before sharply rising by the end of February due to the Russia–Ukraine conflict.
Then, on 8 March, nickel briefly touched $100,000 per tonne due to a short squeeze involving a Chinese bank. This prompted swift rule changes from the LME, which rapidly halted trading of the metal.
The LME move has caused significant investor anxiety regarding the reliability of its trading system, with considerable concern that this phenomenon may spread to other commodities as well.
Nickel has since then dipped back to approximately $$61,714.41 per tonne.
Nickel one week price chart – Credit: Capital.com/ Source: Koyfin
Nickel chart Credit: TradingViewNickel production in Russia
Russia is the fourth-largest producer of nickel after Indonesia, Australia and Brazil. It produces approximately 9% of the world’s total nickel output.
Norilsk Nickel (MNOD), or Nornickel, is the world’s biggest producer of high-grade nickel and palladium, and is also Russia’s largest metals and mining company. The company has considerable operations in the Norilsk Talnakh area in Siberia, Russia.
The Norilsk-Talnakh nickel deposits are the largest nickel-copper-palladium deposits in the world. The company produced approximately 172,357 metric tonnes of nickel in 2020.
Major Russian nickel mines include the Oktyabrsky mine, the Komsomolsky mine, the Taimyrsky mine, the Skalisty mine and the Kola MMC mine – all of which are owned by Nornickel.
Hence, investors are understandably concerned, as the majority of the world is now in the process of shunning Russian supplies – whether mining, banking or other commercial goods. Therefore, both Nornickel and its mine output may be banned in a number of Western countries, which would hike nickel prices further considerably.
Western sanctions are also making it much more difficult for miners to transport their output to various locations due to a scarcity of chartered aircrafts. Investors are thus worried about the possibility of supply-chain constraints getting much worse in the short term.
Russian metals have also been losing credibility in the international markets, following major Russian miners Polymetal International (POLY) and Evraz (EVRgb) announcing that they will be leaving the FTSE 100 index soon.
This may cause investors to turn to other alternatives for meeting nickel demand permanently, including turning to other substantial nickel-producing countries such as Australia, Brazil or Indonesia, which would significantly undermine opportunities for the Russian nickel industry to recover.
Nickel fundamental analysis
Nickel is the fifth-most common metal on the Earth’s crust, making it one of the most common and until recently, cheapest base metals. It is prized for its ductility, strength and resistance to corrosion and heat, making it widely usable in a number of products and forms.
Nickel is also one of only four metals – the other three being cobalt, iron and gadolinium – that are ferromagnetic, which means it can be easily magnetised at room temperature.
Nickel is divided into Class 1 and Class 2 grades. Class 1 nickel has a purity of 99.8% or more and is usually used in alloy steel, alloys and plating. Class 2 nickel refers to nickel-containing products, such as ferronickel, which typically have a purity of less than 99.8%. Such alloys are often used in the stainless-steel industry.
It is the metal of choice for super alloys due to its high ability to withstand extreme heat. Super-alloys in turn, are very resistant to heat, corrosion and oxidisation, aside from being very strong, all of which makes nickel a highly valued base metal.
Furthermore, nickel is also a transition metal, which allows it to form a number of oxidation states, which can be extremely useful in several products. In addition, nickel is widely used for coins, which is another reason for the huge spike in demand.
However, demand for nickel is greatest in the stainless-steel industry where, as a key alloy, it is used to increase metals’ formability, ductility and weldability, and offer additional protection from corrosion.
Use in the EV industry
Nickel is also a fairly good electric conductor, which makes it vitally important to the EV industry.
For example, EV makers use nickel in cathodes that allow vehicles to travel further on a single charge due to their high-energy density. Thus, the recent nickel rally threatens to raise the price of EVs greatly unless the industry can come up with alternatives.
EV makers such as Tesla are slightly ahead of the curve, already experimenting with alternatives such as lithium-iron-phosphate chemistry for their longer-range vehicles. Previously, a nickel-cobalt-aluminium chemistry was preferred.
Aside from the EV industry, nickel is also vital to many renewable energy processes – for example, a copper-nickel alloy is often used in desalination plants to convert seawater into freshwater.
As such processes could be key to helping countries transition effectively to alternative energy resources, this could also drive up nickel demand and prices significantly.
What potential alternatives to nickel are there?
As nickel is often used for armour plating, the recent astronomical surge in prices has prompted investors to look at other metal alternatives – such as copper, tin or zinc.
Among these, zinc is a particular favourite, especially in galvanising steel, which is the coating of steel in order to protect it from early oxidisation. This is because zinc is more reactive than steel, which means that it would protect steel better as the first resistance to outside elements.
While copper is also sometimes considered for use in this process, it tends to be more reactive than steel. This means that if the copper layer gets damaged or scratched, the steel layer beneath will oxidise, leaving the top layer mostly intact.
Zinc is also a relatively cheap option, compared to more high-end plating metals such as gold. In addition, zinc offers increased durability as a lightweight plating solution, as well as having aesthetic qualities. Furthermore, it is more environmentally friendly due to its ability to be recycled.
Copper-nickel alloys are also being considered in some cases as opposed to pure nickel. Such alloys have good heat resistance, however, they are significantly more expensive.
As such, brass alloys may also be a good alternative for use in a variety of products, as well as other alloys – for example, various titanium and pewter alloys.
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