The Sky is the Limit

Don’t narrow the focus on the carbon footprint
The following text in German was published in parallel in a blog to the Handelsblatt annual conference Future Steel 2023 (cf. https://live.handelsblatt.com/den-blick-nicht-verengen-dafuer-ist-das-thema-carbon-foot-print-viel-zu-wichtig). Further interesting articles about the future of steel production can also be found there.

It can happen quite often that important future-orientated topics are diluted in public and political discussions. Climate change, electric mobility, the pandemic, migration and much more could be taken here as examples. This could be due to the complexity which unfortunately lies behind many questions, but it can also be an expression of uncertainty when it comes to knowledge and sometimes science. Here it can often be simpler (and perhaps even safer) to put matters in a clear and plausible context. An already reduced attention span does the rest. This is not good, for then potential is lost or at least leads to a shadowy existence in the public eye, even though more attention and diversity would be important.

This is the case with “green” steel in respect to the green climate-friendly transformation of the steel industry. If discussions and also statements of ministers were followed in the past then it would have seemed that the only saving grace might be hydrogen. And sometimes it was more the longed for visions rather than the facts which dominated discussions. In this context even the capacity bottlenecks and other restrictions were eagerly suppressed. Only more hydrogen was better than hydrogen, even if it was not realistic in terms of the time scale and costs. Quite a few European manufacturers of steel and stainless steel have already made a huge contribution in carbon savings. The use of scrap as a high value and sustainable raw material from recycling already leads to a massive carbon reduction, unlike its equivalent in primary raw materials, also and especially in comparison to the new Asian competitors.

What has long been kept out of the limelight is now finding its way into forums and experts dialogue, but unfortunately still not so much in the public eye. The importance of the raw materials used, as well as the energy consumed in a plant is enormous for greenhouse gas emissions and other negative external effects. And therefore, when a comprehensive look is taken of the carbon footprint of an electric vehicle, then the whole thing is not quite as round as the tyres. Apart from the essential importance of the energy mix to produce power (keyword: coal), it is the battery raw materials which give the ecologists of the car manufacturers quite a few headaches. This is because this heavy ecological backpack from production can only be compensated by the lower emissions after a very long time over the length of service.

And what is valid for cars is also valid for carbon steel and stainless steel. As well as hydrogen, the metals and other raw materials used must also take centre stage as they are responsible for quite a large part of greenhouse gas emissions. In European stainless steel production today, well over 80% of raw material input is already covered by high quality stainless steel scrap. The stainless steels produced with a high scrap content differ in no way at all from a steel which is produced only from primary raw materials. According to studies by the scientific institute Fraunhofer IMWS, the usage of scrap per tonne saves significantly more than 4 tons of carbon in comparison to the corresponding primary raw materials, and with carbon steel this is at least 1.67 tons carbon. Huge amounts then.

And it gets even better. Electric arc furnaces, as the modern means for smelting steel, are operated with electricity which could come entirely from sustainable sources if there is sufficient availability. This is a beacon of light in European stainless steel production and its sustainable and green steel production. In addition, in regard to scrap usage, there are numerous possibilities lying dormant in the blast furnace route. It is just unfortunate that this is not known at all by the wider public. Has the focus been too one sided on hydrogen for too long because the German blast furnace infrastructure required this?

Slowly raw materials and scrap are finding their ways into the conscience. Nevertheless, at the moment there are still no incentives for a fair competition between raw materials. The negative external climate costs of the mostly imported primary raw materials have so far not been sufficiently taken into account in the emission trading system of the EU as well as in the absolutely necessary carbon border adjustment mechanism CBAM. Therefore, still today, the price determines which raw materials are used. Steel buyers and consumers could change this, but are they really willing to pay more? There is probably still a need for a mixture of regulation and monetary incentives.

Palladium price fantasies are breaking up
The metal palladium has seen a breathtaking price rally over the course of the last eight years. In February of 2016, one ounce of the metal cost about 500 US dollars, then the price rose in the following years up to 3,400 US dollars. The high demand for the metal came principally from the car industry, where it was used as an important component in catalysts. In addition, the metal is used in fuel cells, spark plugs in aviation and in nanotechnology.

In May last year the news portal Reuters already reported about the efforts of car manufacturers in substituting palladium with platinum, in order to reduce dependency on Russia. Norilsk Nickel produces about 40% of global supply. At that time experts in the sectors were already talking about expectations of a possible supply surplus in the near future.

In the meantime, the feared disenchantment in the palladium market has now been realised. The palladium future is now trading around 1,600 USD per ounce and has therefore reached the lowest level since December 2021. The efforts of the car manufacturers in substituting it with cheaper platinum have obviously been successful. Some time ago already, the biggest primary producer of platinum worldwide, American Platinum, declared that within five years up to one million ounces of palladium could be replaced by platinum.

There are already now some electric cars on the automotive market which totally do without palladium. In addition more and more old vehicles which contain palladium are reaching the end of their product life cycle. An analyst of the major Bank of America describes palladium as a one day wonder since its demand is 90% from the car industry. In this context, it becomes also very clear that the “sky is the limit” for all raw materials. High prices must be justified fundamentally in the long run. Otherwise the substitution effect as described comes into play.

Indonesia’s nickel boom and its dark side
In recent years hardly any other topic has moved prices on the nickel market as much as the nickel deposits in Indonesia (and in this connection unfortunately some prominent players). The deposits in the form of nickel ore are considerable. Accordingly, numerous companies, from various raw material and stainless steel producers to car manufacturers have kept a keen eye on this commodity rich country. In recent years they have reported investment projects worth billions in order to have access to the coveted raw materials in Indonesia. The country, or rather its politicians, recognised early the potential of the metal and took the necessary steps so that Indonesia did not only export its ores, but also that added value, employment and, therefore, prosperity would be created for the country.

After the export of nickel ore was banned in 2020, various companies, especially from China, invested in domestic smelting plants in order to produce nickel intermediate products from nickel ores, such as for example, nickel pig iron (NPI) and ferronickel, to then export them. This then created jobs for Indonesians, at least only to the extent that the Chinese did not bring their own workers with them at the same time. However, there are reasons to believe that the working conditions in the smelting plants are questionable. In January 2023 various media sources reported on violent clashes in the smelting plant on the island of Sulawesi, which the Chinese Jiangsu Delong Nickel Industry Co. Ltd. had built for 2.7 billion US-dollars. An Indonesian and a Chinese worker were killed when there were clashes with security forces after the protest for better working conditions and wages.

Now the Indonesian Minister for Investments Bahlil Lahadalia, voiced the chain of thought that the construction of new nickel smelters should be restricted in the future in order to build factories instead which would generate more added value, such as for the production of raw materials for the battery industry or even battery production as such. At the same time Minister Lahadalia complained that the current smelting plants use polluting coal. New plants should be run on green energy. Unfortunately, Mr. Lahadalia has not so far explained how he would like to achieve this goal specifically.

The cooperation between the German chemical group BASF and the French mining company Eramet should delight the investment minister, which could be why his office willingly shared the information with the media. Both companies plan a joint investment worth 2.6 billion US-dollars in a works in Weda Bay, Indonesia, to produce nickel for the manufacture of batteries for electric vehicles. Specifically, a plant for high-pressure acid leaching, HPAL, is to be built in order to produce battery grade nickel and cobalt intermediates. The annual capacity should be 67,000 tons nickel and 7,000 tons cobalt.

At the announcement the ministry referred to the statements of the BASF CEO Dr. Martin Brudermüller, that both parties are in the final stages of the discussions and expect an agreement in the first half of this year. At the end of 2020 already, both companies made an official announcement about a joint feasibility study for such a project.

At the end of 2021, there were fifteen smelting plants for nickel containing intermediate products in Indonesia. A government official in the Ministry of Energy once mentioned that the reserves could be depleted in less than two decades if restrictions for the construction of smelting plants were not enforced. In such a context, some people might speak of an exploitation of natural resources.

British regulators are still investigating the short squeeze in LME nickel
The British Financial Conduct Authority (FCA), in an interview with the news agency Reuters, has said that it is still investigating the circumstances surrounding the decision of the London Metal Exchange (LME) to suspend nickel trading on the 8th March 2022 following a short squeeze. A short squeeze is when short (sale) positions on an exchange have to be closed very quickly and in great numbers which leads to an excess in demand, which is then reflected in sharply rising prices. The FCA wants to guarantee that all lessons will be learned from this incident.

In April of last year, the FCA had already announced that, together with the Bank of England (BoE), experts would be commissioned with the investigation who would report back to both institutions. The British regulator, Prudential Regulation Authority (PRA) and the FCA are, in addition, investigating individual market participants who held significant LME nickel positions, in order to assess their risk management and governance. While the FCA is responsible for the oversight of the LME, the BoE is concerned with the supervision of the clearing house LME Clear.

While the British supervisory boards are still examining the market distortions on the nickel market, the LME, with its own commissioned independent enquiry and other measures, is trying to regain the trust of the market. With this in mind, the LME has also expanded its nickel committee by four new members. With the admission of the new members from the industry, the LME wishes to ensure and document that pricing and trade of the LME nickel future should serve, above all, the needs of the physical market.

Not surprisingly, as a consequence of the events of March 2022, nickel trading on the Exchange collapsed significantly in the following months. The Exchange recorded a slump for nickel of 28% compared to the year 2021. Quite a few stakeholders have turned their backs on the LME, at least temporarily. Because of the continued low trade volume the contract can still not be traded in the early (European) morning hours so that the trading volume can be concentrated in the European trading times. In a report, the news agency Reuters, citing an unknown source, claims that the FCA has blocked the resumption of nickel trade in the early morning hours.

Regarding the legal assessment of the complete cancellation of all exchange transactions in the LME nickel market on the 8th March 2022, which was vehemently criticised by some speculative market participants and is also part of legal disputes, there is a further reference. Albeit with a very sad background. The terrible earthquake in the Turkish-Syrian border region also led to heavy losses on the stock market in Istanbul. As the stock exchange announced, trade on the 8th February was suspended and all transactions of that Wednesday morning before trade was suspended were reversed. The low volume of transactions, as, for example, the Frankfurter Allgemeine newspaper reported, would have made an efficient pricing impossible. Even if the cause is incomparable, an orderly pricing on the LME was also not possible on the 7th and 8th March 2022, which is why the LME was also forced to make use of the seldom used instrument of cancelling trading transactions.

The Fed does not see itself as a climate policy maker, yet the ECB does
At an event in Stockholm, the US Federal Reserve President, Jerome Powell, emphasised that his institute does not engage in climate policy. He said that without explicit legislation it would be inappropriate to use the Fed’s instruments to promote a greener economy. Powell also added “We are not a climate policy maker and will not become one”.

At the same event the ECB Executive Board member, Isabel Schnabel, expressed the view that the ECB is taking into account the climate goals of the Paris Agreement. According to Ms. Schnabel the ECB must make even greater efforts in order to meet the targets. Already in the past few months, the ECB has been taking so-called climate criteria into account when reinvesting funds from corporate bonds which have matured.

Futures for Arabica-Coffee are at their lowest level in 18 months
At the end of 2020, the investment bank, Goldman Sachs predicted a multi-year super cycle for the commodity sector. After dramatic increases at times because of supply chain problems during the Covid-19 pandemic and then the war in the Ukraine, over the last few months there has been an easing off in the commodity market, which was not only observed in the energy sector.

In view of the weaker outlook for the global economy, the mercantile exchange contract for Arabica-Coffee is at its lowest level in 18 months in the meantime, and has reached a price level which was last seen in July 2021. Unfavourable weather conditions such as frost and drought in the coffee growing countries of Brazil and Columbia had led to price jumps. Investors are now waiting to see how good the new harvest will be, which has put more pressure on the price.