Nickel was the worst performing base metal on the London Metal Exchange (LME) last year as the market digested the impact of new supply from Indonesia.
According to the International Nickel Study Group, mining production in Indonesia increased 29.2 percent in the first 10 months of 2023 compared to the same period last year. Demand for nickel is growing fast because of its use in electric vehicle batteries, but nowhere near as fast as supply is growing.
Until recently, the growing supply glut was confined to intermediate products such as ferric nickel and matte, rather than the highly refined metals traded on the London Metal Exchange and Shanghai Futures Exchange.
That is changing as share prices on both exchanges rise and the price gap between refined metal and other forms of nickel Narrows.
Nickel for three-month delivery on the LME, currently at $16,050 a tonne, is eating into the cost curve, and struggling producers could face more margin pain.
Stock market surge
For much of last year, low inventories on the London Metal Exchange (LME) were an anomaly in the bearish narrative of nickel.
It is a symptom of the disconnect between Indonesia's rapidly expanding intermediate production capacity and the tight refined metals part of the supply chain.
That began to change in the fourth quarter of last year. lme registered stocks have grown rapidly from 37,170 tonnes at the beginning of September to 69,510 tonnes now.
One of the big drivers is the amount of Russian metal coming into the LME system.
Russia's guaranteed nickel stocks rose from 7,068 tonnes at the end of August to 17,772 tonnes at the end of December, likely reflecting the dual impact of weak demand and self-imposed sanctions by Western users.
Will make a surplus
But the real game changer is the rising tonnage of Chinese metal in the London Metal Exchange's storage system. As recently as August, China had no qualified domestic nickel at all. Inventories stood at 6,408 tonnes at the end of December.
This is thanks to China's expansion of capacity to convert Indonesian intermediate products into refined metals that can be delivered at the lme.
Macquarie Bank estimates annual capacity will reach 250,000 tonnes by the end of the year.
The advancement of processing technology coincides with the LME's efforts to boost equity liquidity following the March 2022 market blowout.
The London Metal Exchange lists two new Chinese brands of nickel produced by Huayou Cobalt and Jingmen Gem, with an annual capacity of 6,600 tonnes and 10,000 tonnes respectively. They are on the LME's good delivery list, along with Jinchuan and Intime Cash.
They both produce full-plate cathodes, and LME stocks of full-plate cathodes have almost doubled to nearly 34,000 tonnes since the beginning of December.
But it is not just the LME that is seeing more and more Chinese metals coming to the market.
Shanghai Futures Exchange inventories, which are highly dependent on the Chinese nickel brand, only hit a multi-year low of 560 tonnes at the end of May 2023. Since then, stocks have mushroomed to 14,193 tonnes, the highest level since January 2021.
Under pressure
Both exchanges would welcome more equity liquidity from Chinese changers.
However, this is not good news for other producers.
Nickel prices on the London Metal Exchange are hovering near three-year lows. Hopes that index rebalancing at the start of the year would boost prices were dashed, with little discernible impact from expected buying.
Higher-cost carriers are struggling.
Panorama Resources Australia went into voluntary administration in December. Company officials said on Jan. 8 that the Savannah Nickel project would suspend operations because "prospects for achieving operational and financial profitability in the near term are low."
First Quantum announced this week it would cut jobs and production at its Ravensthorpe mine in Australia amid what it expects to be a "severe" three-year slump in prices.
Even large companies such as BHP Group are feeling the pinch. "We are working hard to remain globally competitive in a very difficult operating environment," said Jessica Farrell, president of the company's western nickel division.
The problem is that there is no sign that Indonesia's nickel boom will stop anytime soon.
In fact, Macquarie analysts note that "our base case for the entire nickel market is in surplus all the way through 2027, likely across all major product categories."
As more and more of the surplus is converted into refined metal, exchange inventories will rise further, putting even more pressure on nickel prices.
