As the supply of Class II nickel -- containing less than 99.8% nickel -- continues to grow at a rapid pace, particularly in the battery sector where intermediates like mixed hydroxide precipitate, or MHP and nickel matte are gaining dominance, consumers are increasingly resistant toward paying higher prices, especially with a slowdown in the Chinese EV sector on the cards.
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Booming LFP demand overshadows NMC
In recent months, demand for nickel sulfate remained tepid ahead of China's Lunar New Year, translating to fewer spot trades in the market as many focused on fulfilling existing term contracts.
"I think consumers would just rely on inventory for now, or they will only buy material if they think prices are low enough," a refiner source said.
Platts assessed spot battery-grade nickel sulfate with minimum 22% nickel content and maximum 100 ppb magnetic material at Yuan 37,800/mt ($5,435/mt) DDP China Dec. 27.
Nickel sulfate prices were up Yuan 3,800/mt, or 11%, since the start of the year, but down Yuan 1,500/mt since the start of the quarter on Oct. 3. Prices in the last quarter had remained relatively stable within the Yuan 37,700-40,700/mt range with minimal fluctuations.
"Downstream demand is going down, this is partly due to seasonal destocking but also the fact that market is unclear about the future demand if EV subsidies are scrapped," a Chinese producer said.
Tax exemptions for new energy vehicles, or NEVs, in China will expire by Dec. 31 and the impact of the roll-off is particularly evident on nickel and cobalt -- two of the main raw materials used in nickel-cobalt-manganese, or NMC batteries.
Due to the higher price tag associated with the production of NMC compared with lithium-iron-phosphate, or LFP batteries, in China, LFP had overtaken NMC battery production and sales since April this year.
Although China's high domestic EV sales and EV adoption rates had boosted the country's battery material output, LFP battery production had jumped 183% year on year in January-November, while the NMC battery production rose 130%, according to data from China Automotive Battery Innovation Alliance (CABIA).
Sources expected LFP to retain the lion's share of the domestic market in what looks to be a challenging year for the EV market, which could dampen demand for nickel going into 2023.
Despite the fall in demand, nickel sulfate refiners say it is difficult to lower spot offers due to higher raw material costs, with most materials still being priced basis LME.
"At current LME nickel prices, we are making a loss on every ton of material we produce," a Chinese producer said Dec. 21.
Supply glut limits nickel price ceiling
In Nornickel's latest Quintessentially Nickel market report, the Russian nickel giant estimated that the entire nickel market may potentially hit a surplus of 109,000 mt in 2022. Supply is expected to climb 18% year on year to reach 3.19 million mt against the projected demand of 3.08 million mt, up 8% on the year.
The growth in volume is largely contributed by intermediate production out of Indonesia, which is paving the way for cheaper production routes and squeezing nickel briquettes out of the picture.
MHP, one of the major feedstocks for nickel sulfate, is traditionally priced as a payables on the LME nickel metal price.
With the expectation of more intermediates supply coming into the market, coupled with the current tepid downstream demand, MHP payables had been dwindling from 80% payables through most of November, to hit 70% payables as of Dec. 22, according to S&P Global Commodity Insights data.
S&P Global Market Intelligence's Metals and Mining Research forecasts mined nickel production to reach 3.672 million tons in 2023, up 11.9% year on year, with the Indonesian nickel production making up 61% of the growth in supply.
With the supply glut expected to put further pressure on nickel prices in the near term, discussions on different pricing mechanisms that better reflect this market surplus are expected to become a key theme in 2023.
Within China, a variety of pricing mechanisms have been proposed including pricing payables nickel sulfate, a fixed all-in price, or even considering intermediates as deliverables on exchanges.
"We're not sure which method would work better for pricing nickel, but I think the pricing formula will definitely have to change in the near future," a North Asian consumer said.
What lies ahead?
Looking ahead, sources are expecting the holiday lull to last until early February, with sweeping production cuts across the industry limiting procurement appetite. Beyond that, a possible slowdown in EV sales could put further pressure on refiners despite increased raw materials supply, if costs do not reflect the market surplus.
"Regardless of market balance, pricing will remain the big issue for the nickel market," a Chinese trader said. "Downstream cannot cope with the heavy losses from current pricing mechanisms; it is just not sustainable for the industry."