Three months after a historic short squeeze on the London Metal Exchange, which sent nickel prices soaring past $100,000/mt, the LME is back in the spotlight. This time it's facing two lawsuits, a complaint and a membership cancellation over the situation.
Many market participants have openly voiced their concerns and dented trust in the exchange, with hedge funds and trading houses leading the way in reducing nickel positions or backing out entirely.
For nickel sulfate producers and consumers, who have traditionally relied on LME nickel contracts to hedge price risks in the physical market, has there been an inclination to depart from tradition and seek out alternatives?
LME nickel prices disconnected from sulfate fundamentals
Nickel sulfate is one of the key raw materials that goes into the production of nickel-cobalt-manganese (NCM) batteries. The main feedstock for nickel sulfate is mixed hydroxide precipitate (MHP), nickel briquettes/powder or nickel matte.
However, nickel briquette, one of the few deliverable products on the LME, has been losing steam among Chinese refiners and precursor makers due to high metal prices. Some sources predict that it could be abandoned entirely in favor of cheaper intermediates like MHP and matte. But because MHP and matte are not deliverable on both the LME and Shanghai Futures Exchange, nickel prices to date have yet to reflect the new volumes from Indonesian mines this year, market sources said.
"The market is aware that exchange prices currently do not reflect market conditions for the battery sector," a Chinese analyst said. "The pricing of nickel is a huge headache for everyone and definitely merits further discussion."
Loss of exchange liquidity keeps risks high
Liquidity on the LME saw a huge hit after nickel trading was suspended for eight days starting March 8. While nickel prices have since dropped to below $30,000/mt, average daily trading volumes on the LME continued to trend downwards, falling to just above 40,000 mt in May, down 35% on the year.
"The market is still feeling the disruption from the LME and today the contract is still not working like it was before this event," one European nickel sulfate producer said.
A European automotive producer said they have also been wary of the LME nickel price since the short squeeze.
"We will definitely be looking at linking contracts to a price index for nickel," the automotive producer said. "Ideally, automotive OEMs want long-term fixed price deals, but we know the risk associated with this. Sellers find a way to rip up a contract if the spot prices go too high – we have seen it on other raw materials."
Although Chinese market participants traditionally reference SHFE in the domestic market, the LME-SHFE arbitrage remained a significant challenge as China is a net importer of nickel.
"We did receive requests from our Chinese customers on switching to SHFE pricing not long after the LME suspended trading," said a European trader. "But we shot down the idea as we have no position in Shanghai, which prevents us from hedging our own risk."
Some Chinese sources also pointed out that like the LME, SHFE only allows trading of nickel metal, which doesn't solve the fundamental issue of a growing decoupling between exchange prices and market fundamentals.
Unlike other battery materials such as cobalt and lithium, nickel is unique in not being primarily driven by global battery demand. About 70% of the world's nickel production is consumed by the stainless steel sector, while batteries take up a modest 5%.
S&P Global Market Intelligence forecasts global primary nickel consumption to rebound year-on-year due to stainless steel capacity expansions in China and Indonesia.
However, future growth in nickel demand will largely be driven by the battery sector, which is forecasted by Market Intelligence to move the market into a supply deficit in 2026. Many producers and end-users in the market also predicted that the battery sector's demand for nickel will accelerate substantially, with some pinning it to near 35% of total demand by 2030.
New contracts, pricing mechanisms: The way forward?
Despite the hiatus on the exchange, market sources said that they have yet to see a shift in the traditional LME-linked payables system for MHP, which is still the most favored raw material for nickel sulfate refiners. Instead, payable values fell from 90% to around 68%-70% over the past three months as a compromise to higher metal prices.
Currently, the payable for MHP is negotiated between buyer and seller, with no index or reference price commonly used by market participants. However, non-LME-linked pricing methods have been heard for other intermediates like nickel matte, which is expected to expand its market share as Chinese-invested mines in Indonesia ramp up volumes in the coming months.
Matte was heard to be priced as a payable basis domestic nickel sulfate price, according to traders in China.
"This pricing method has less risk for the battery industry compared to using exchange-linked prices which are driven by stainless steel, especially when market demand is weak," a Chinese trader commented.
Other nickel intermediates such as ferronickel and nickel pig iron were also heard to have adopted fixed pricing, decoupling from the LME altogether.
When surveyed on the possibility of a nickel sulfate contract, market participants were in favor of the idea, with a Chinese precursor maker quoted saying that "it was definitely the way forward for the battery industry."
"Previously, it was good so long as the LME was working. It was straightforward and the discussion was just on the nickel sulfate level. It would be good to have a reliable nickel sulfate benchmark," a European producer said.
"These contracts would be very welcome to the battery industry," a Chinese refiner source said. "Personally, I think a nickel sulfate contract would be a great idea as it would more closely reflect actual market conditions."
A South Korean battery maker commented that while it was a big challenge to change the index for nickel sulfate, many consumers did have the inclination to switch, and a nickel sulfate contract would be welcome.
Product standardization was a key issue highlighted by market participants, but sources largely agreed that the discussion and trial of new pricing methods was a step in the right direction.
"There will naturally be a progression away from nickel metal as battery markets expand," said a European producer. "So a contract would be well-timed if launched."
With reports from Michael Greenfield and Scott Yarham