Singapore — Two key Southeast Asian nickel ore producers that shaped the market in recent years -- the Philippines and Indonesia -- are poorly placed to take advantage of a boom in battery demand from the growing electric vehicles market.
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Their predicament stems from the lack of technology and investment needed to produce Class 1 battery-grade nickel sulphate -- a direct outcome of the regulatory policies enforced by the two countries in recent years.
Two years ago, the Philippines and Indonesia were two of the world's largest producers of nickel ore, accounting for a third of global production. The type of nickel laterite ore produced by them largely feeds the steel industry in China.
An upgrade in production capabilities to meet battery demand requires access to metallurgical processes that are both expensive and proprietary, and heightened political risk has made foreign investors reluctant to boost investment in mining.
In Indonesia, prolonged resource nationalism saw an outright ban on the exports of unprocessed nickel ore in January 2014 that forced mines to shut, leading to the loss of thousands of jobs, disrupting supply chains and losing millions of dollars in revenue.
In the Philippines, an environmental crackdown trimmed export volumes that are still hurting the industry.
With foreign investors loathe to pour money into new projects, rival producers in regions such as New Caledonia and Australia have taken the lead to develop their own reserves of both high and low grade nickel ore.
One black swan on the horizon is the possibility that Chinese miners like Jinchuan commercialize the refining of low grade nickel laterite ores from the Philippines and Indonesia into battery grade nickel, and turn the market on its head.
This would be similar to how Chinese smelters commercialized nickel pig iron, a cheaper alternative to pure nickel, and ended up completely transforming the nickel market.
The biggest challenge, however, lies in current market inertia.
The inventory surplus that has kept nickel prices under pressure at around $13,000/mt continues, making it hard to justify investment in new projects, Graeme Train, Trafigura's head of metals research, said recently.
"At the moment, there is very little capacity being added because the incentive price in terms of capex is higher than the current nickel price," Train said. "The biggest constraint is that the nickel price isn't where it is supposed to be to incentivize people to invest for a battery market."
Nickel is the fifth most common element on earth, and was once known as devil's copper due to the color of its laterite ores. Nearly 65% of nickel demand comes from the steel industry, as it makes stainless steel resistant to corrosion. Less than 3% is used to make batteries.
Currently, annual nickel mine production is at 2.1 million mt with 59% coming from lateritic ores and 41% from sulfide ores, according to Mark Mistry, senior manager for public policy at Nickel Institute, a trade body of nickel producers.
The differentiation in ores is important in supply-demand dynamics.
Most traditional nickel projects were based on sulfide ores as the production process was simpler and cheaper, but when the ores became scarce, the market gravitated towards laterite ores that were costlier to extract.
These laterite ores are mostly found in Australia, Indonesia, the Philippines, Brazil, Cuba, New Caledonia and the US. Sulfide ores are found in South Africa, Russia, Canada, Australia and China. Around 60% of global nickel ore reserves are nickel laterite and 40% are nickel sulfide.
Class 1 battery grade nickel sulfate is mostly produced from sulfide ores. The few struggling laterite projects in development globally use proprietary processes and no major projects are planned in Indonesia and the Philippines.
Vale Indonesia, a unit of Brazilian mining giant Vale, produces an intermediate product called nickel matte from high grade laterite ore for Sumitomo's battery operations in Japan, but plans to increase capacity have been slow.
"Neither country is really positioned for the potential battery boom because all of the ore being exported by them goes to nickel pig iron or ferronickel production. And the two are not suitable raw materials for battery nickel sulfate production," according to Wood Mackenzie analysts.
That leaves Jakarta and Manila in a tough spot.
NICKEL MARKET OUTLOOK
The Philippines and Indonesia are not alone in their predicament.
Laterite projects around the world have suffered capex overruns and were on the verge of shutting down due to losses, particularly when competition from Chinese nickel pig iron hit markets.
For example, Glencore's Koniambo project in New Caledonia, Vale's New Caledonia project and the Ambatovy mine in Madagascar operate at a capex intensity of $120,000/mt, according to analysts at BofA Merril Lynch.
Comparatively, current nickel prices on LME are around $13,000/mt. Despite the hype around battery demand, nickel markets remain well supplied and prices low.
Trafigura's Train said that by 2022-2025 the nickel market was expected to see a deficit of 50,000-100,000 mt of nickel as per current plans of production.
But Trafigura has chosen to go down the sulfide route with it's 15.5% stake in Finland's nickel and cobalt miner Terrafame Ltd, that was backed by an additional $175 million funding package in November 2017 to support EV battery investments.
Terrafame plans to start a new plant in 2020 to produce 150,000 mt of nickel sulfate that would make it one of the largest producers.
Overall, the prognosis for nickel is slow demand growth in the short term, but tighter markets in the longer term.
Societe Generale said in its commodities outlook that demand for stainless steel and nickel alloys in the aerospace, battery and automotive industries would continue to underpin consumption growth at 2.6% in 2018 to 2.15 million mt.
JP Morgan says among base metals, nickel is the main recipient of bullish EV sentiment, adding that the "story will play out over the longer term rather than [in 2018]."
SocGen forecasts nickel prices to average $13,000 in the coming six months. JP Morgan expects a price range of $10,000-12,000/mt this year.
BoFA predicts an eventual deficit in nickel supply, particularly battery grade nickel, which may give rise to "a scarcity premium on nickel prices." It said that market participants had started to factor in higher demand from EVs, after Indonesia's U-turn on its mineral export ban and the Philippines' deferral of environmental mine closures.
-- Eric Yep, email@example.com
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