Might nickel be the brake on the progress of electric vehicles?

Prices of all key metals used to make electric vehicle batteries are set to increase, according to market observers, as recent mine investment appears insufficient to cope with the expected uptick in demand over the coming years from the battery sector.

While for lithium expectations are that as we reach 2022 and beyond there should, at current project adoption rates, be enough supply, the picture looks much tighter for nickel where demand is expected to outweigh supply after 2020. As a result, nickel is expected to become the bottleneck that may impede the march of the EV in the coming decade.

There are two main reasons behind the supply shortage in the coming decade: Current underinvestment in nickel projects hindering supply growth while higher adoption rates going forward coupled with a potential switch to the 8:1:1 nickel-manganese-cobalt battery technology would further bolster nickel demand.

Despite the LME cash settled nickel contract having risen almost 20% in 2017, and a further 11% since the beginning of 2018 to just above $13,000/mt in early February, nickel is still in a comparatively low price environment.

Related podcast -- Battery metals still on the up: technology may be game-changer

Before February 2015 the LME nickel contract had a price floor of $15,000/mt and averaged just under $20,000/mt between 2010 and early 2015. While lithium and cobalt prices are hitting new highs almost every month, nickel remains cheap which makes net present value calculations for investors much trickier and explains why there has been such little interest in investing in new nickel projects.

This is underlined by data from NorNickel showing capital expenditure on nickel projects worldwide has dropped to $2 billion in 2017 from $7 billion in 2012.

The lower capital expenditure on nickel projects started to show in 2017, while between 2013 and 2016 nickel sulfide production remained steady at 800,000 mt a year, the continuous absence of new projects coming online led to a drop in nickel sulfide production of 100,000 mt in 2017, and further falls are expected over the coming years.

Looking at nickel demand in the coming years in more detail, one of the main driving points behind the strong growth expected is the switch to 8:1:1 nickel-manganese-cobalt battery from the current 6:2:2 technology.

Attendees at the advanced automotive battery conference in Mainz, Germany, in January said the 8:1:1 version would not to be commercially viable before 2020.

Data from NorNickel shows that the annual deficit by 2021 will be around 300,000 mt, while a report from McKinsey estimates that demand for nickel will increase to 2.5 million mt by 2025 from 2 million mt.

These production figures include grade one and grade two nickel -- grade one is used for batteries while grade two is predominantly used for steel making.

The McKinsey report highlighted that while the stainless steel industry would remain the largest end-user of nickel, its share is expected to fall to 60% in 2025 from 70% now with EVs accounting for the lion's share of that drop.

Brazilian Nickel is forecasting an even larger deficit by 2025 with nickel supply at around 2.3 million mt and demand of 2.85 million mt (up 650,000 mt) with 400,000 mt estimated from battery production -- up some 370,000 mt from 2017.

It therefore seems likely that investment in nickel mining will pick up in the coming 12 months, particularly if nickel prices continue to increase this year and adoption rates remain on an upward trend. This could make 2018 the tipping point for nickel investment.

The technology is clearly pointing to higher nickel content in batteries in the next decade while current nickel supply appears insufficient to cope with this future demand.

Current forecasts should mean mining companies will searching hard for feasible projects this year despite low prices and potentially not very promising net present value calculations.