LME nickel reflects the market, but of course not all the time
Even if it is generally repeatedly said that the nickel contract on the London Metal Exchange (LME) does not reflect market conditions, from our point of view, price development and level are currently in line with the fundamental situation and other parameters. Actually, in all (Exchange) markets it has never been the case, that only fundamental data, i.e. supply and demand, were responsible for each phase of price formation. Distortions of speculative nature have always occurred at times, which have then been ironed out after a while through arbitrage and market events.
Therefore, in addition to the very justified criticism of the LME regarding events of March 2022, the desire for a “suitable” and opportune pricing is also quite often a priority for many. Recently, the LME announced a cooperation with the Shanghai Futures Exchange (SHFE) in regard to product development. It is clear that in securing liquidity in certain futures, such as nickel, it will be less about competition between the two exchanges, but more about a sensible and harmonizing supplementation and cooperation.
We still maintain our view that an internationally recognised price reference for nickel is necessary and sensible and that the LME nickel future, with all the necessary improvements and security measures, is still the best existing alternative, and will, therefore, always win through. Consistent with this, Fastmarkets reported that Chinese commodity purchasers of nickel were once again strongly orientating themselves towards the LME nickel price as a contractual price mechanism. And it was also heard from market participants that the sometimes quite considerable discounts for non-Exchange nickel qualities are not seen as sustainable.
Distortions, i.e. deviations from a fair price, of course, did not just take place at the top of price ranges, as overshooting has been seen historically on both the upside and the downside. To be fair, it must be added that, unlike the price for electricity, for example, which cannot be stored, a negative price for nickel is inconceivable. If anyone would like more detail, also about the scientific origins and microeconomic analysis, then the following study by Prof. Dr. Peter Posch can be recommended “The Nickel Market: Playing Field of Speculators or driven by Fundamentals” which was already commissioned by Oryx Stainless in 2011: https://www.oryx.com/en/stainless-steel-hedging-against-volatile-nickel-markets-instead-of-speculation/
With these preliminary remarks in mind, it can be stated that, at the moment, the price of nickel on the LME is moving in a rather narrow range between USD 18,400.00/mt and USD 19,000.00/mt. With the exception of the building industry, the economic environment, despite all challenges, is showing itself to be stable at a lower level, which could be interpreted as a bottoming of the cycle. How long this bottoming out or sideways movement can be maintained remains to be seen. Even if inflation has not yet been defeated, the interest rate increases by central banks seem to be slowly coming to an end. In addition, energy costs have also returned to a relatively normal level.
“Green Future – only with us”
On the 4th and 5th October 2023 in Dresden the annual industry meeting of the Federal Association of German Steel Recycling and Waste Management Companies (BDSV) took place. Within this framework, there were a number of keynotes about various topics, which were moderated by the association’s president Andreas Schwenter. Oryx Stainless, an active member in this industry association for many years, also made a contribution on the topic about the transformation of the industry and the potential trade restrictions of scrap markets. Roland Mauss, CFO of Oryx Stainless and Presidium member of BDSV, explained, on the topic of transformation in the steel and stainless steel industry that all companies in the value chain have been in a period of transformation for quite some time now and steel recycling companies are playing an especially significant role in this. Without a doubt, these companies are closing the circle and making possible the development from a traditional linear economy to a circular and sustainable economy. The recycling raw material stainless steel scrap ensures, therefore, a decarbonisation of steel production.
The savings made possible in this way are enormous, but unfortunately, despite all the progress and efforts already achieved, are still not widely known by the public in general. In 2010 Oryx Stainless had already commissioned a scientific study through the Fraunhofer UMSICHT about the intelligent recycling of stainless steel scrap in order to reduce carbon emissions. This was then later followed in the BDSV by both “Scrap Bonus” studies, which attracted a great amount of attention, above all in specialist circles. According to the latest calculations made in 2022, the use of one ton of stainless steel scrap would save around 7 tons net carbon compared to the use of the corresponding primary raw materials (already taking into account the carbon footprint of the recycling company being studied). This corresponds to a distance of about 35,000 kilometres with a normal car.
Without these recycling raw materials the so-called “green” steels would not be at all possible. In this way, the European steel recycling branch makes a saving of about 160 million tons climate gases annually, in addition to the avoidance of local pollution and the preservation of natural resources. However, in public media this is hardly worth a mention. Of course, the branch is still making intensive efforts to further reduce the footprint. To this end, renewable energy sources, district heating, photovoltaic and sustainable transport such as rail or inland waterways, as well as electrified production machines, can be used. In other words, the steel recycling industry is well prepared for the industrial transformation, above all, because the business model as such is already at its core sustainable, which (not only) one banker could recently confirm.
Markets must remain open and fair
The question of whether restrictions in the European markets would be necessary in order to supply steel plants with sufficient scrap can still be answered with a clear no. Lobbies and legislation have to be based on scientific facts and not on myths and emotions. It is, therefore, almost cynical when highly subsidised companies and their organizations sometimes now unashamedly through the back door demand export restrictions for scrap markets, for example, in connection with audits and standards for the export of scrap to third countries, as well as the declaration of steel scrap, very abundant in the EU, as a strategic raw material.
In actual fact, this is probably so that attention can be diverted from the more unfavourable, in terms of emissions, blast furnace infrastructure seen in some countries and companies. The stainless steel cycle in the EU shows, however, that already today it functions without exception, even without export restrictions. European stainless steel is, without a doubt, the blueprint for green steel per se: produced in an EAF (electric arc furnaces without technical limitations for scrap use) with renewable energy and largely using the sustainable raw material stainless steel scrap (Recycled content in Europe according to the study of the Karlsruhe Institute of Technology: 85%).
Turning towards the typical carbon steel route, i.e. the blast furnace, it is indeed more difficult as the use of scrap is technically limited (25-35%). Therefore, if there are big steel scrap exports from the EU, it is only because the scrap cannot be used in the existing infrastructure. Also, steel mills are often not prepared to pay for a more complex processing of scrap to a higher quality level and instead prefer to hide behind statements that most steel scraps would not be suitable for the production of high quality steel. In general, the procurement of raw materials for most steel mills is still just controlled by pure economic calculations of the economy, since the negative external climate effects of primary raw materials have so far only been partially integrated into the EU emissions trading system.
Of course, the European steel industry needs protection from “dirty” steel and dumping, but for this the CBAM (carbon border adjustment mechanism) as well as the existing anti-dumping tariffs and safeguards can be very useful tools. It should also be clear to the steel mills that export restrictions on steel scrap, should they really be implemented, would immediately result in retaliatory measures regarding rare alloy elements and actual critical raw materials, with immense economic costs. This should not be risked.
The motto for the future can, therefore, only be: more EAF’s, hydrogen alone is not enough, climate protection is global and does not stop at borders, and therefore, the export of scrap, which cannot be currently used in the EU because of the blast furnace infrastructure makes a huge and necessary contribution to climate protection.
Nickel market balance – it remains tricky
This year, the market is once more looking at a significant surplus in production of primary nickel. At the beginning of October, representatives of the important nickel producing states met in Lisbon for the autumn gathering of the International Nickel Study Group (INSG). Their verdict: global stainless steel production should recover in the second half of 2023 and so the demand for nickel should rise, but, because of the expansion of production capacities for nickel, new production will rise even faster. For 2023 the INSG therefore expects a surplus of 223,000 tons, with a global demand of a good 3.2 million tons. In comparison to the previous year, this is just a little more than a doubling of the surplus.
But this is not all: for 2024 a surplus is also expected of up to 239,000 tons. And this is with a significant increase in demand of 9% (!) up to almost 3.5 million tons – i.e.the expansion of nickel production capacities is not yet over. What, however, will probably change is that the new capacities will also introduce more Exchange deliverable Class I nickel to the market. The surplus will, therefore, move away from the mainly non-deliverable Class II nickel pig iron. A possible impact on LME warehouse stocks and pricing cannot be excluded.
Most investments in new capacity concern the state of Indonesia, whose extraordinary role in nickel has already been described in previous editions. Recently in Indonesia there was a temporary shortage in the nickel ore supply after authorities had initiated a (still running) inquiry into illegal mining. In this context the allocation process for production quotas was also adjusted. At the end of September, a representative of the Indonesian government stated to the press that there would be no new production quotas awarded for the rest of the year. A new allocation process for 2024 would begin in November. The introduction of a local price index was also announced for November, which could show movements for nickel pig iron, the intermediate product mixed hydroxide precipitate (MHP) and even nickel matte.
Confidence in the LME returns
Apropos prices: it seems here (see also the above) that the LME nickel price, already discarded as a reference price by some, is going through a revival again. According to reports, the LME nickel price is currently once more being used as a reference in Asia for the trade in ferronickel or in the intermediate product MHP.
In general, since the nickel disaster of March 2022, the LME has put in a lot of work to build up confidence once more. To this end, the rules for a supplier to be listed have been adapted and simplified, with the aim of registering more producers and, thereby, increasing the physical market depth. At present, 25 “brands” are listed for the most common product forms, cathodes, cut cathodes, briquettes, pellets and rounds. Just last summer Zhejiang Huayou Cobalt was added to the list as a supplier. More Chinese companies are showing interest, including the Tsingshan Group.
Besides confidence building and the expansion of the supplier portfolio, the expansion of the nickel production portfolio was, and is, also under discussion, according to the LME CEO Matthew Chamberlain in an interview with information provider Fastmarkets. The extension of the contract to include nickel sulphate or even Class 2 products such as nickel pig iron or nickel matte was discussed. While the LME is basically open to such an adjustment, the industry’s signal was, however, very clear: according to Chamberlain, the LME is a price reference for Class 1 nickel and the highest priority is to strengthen this and to ensure the necessary volume and liquidity.
A look at the Philippines
With Indonesia’s size and dominance in nickel, it is too easy to forget that there are also other important mining countries. One such mining country is the Philippines, where in recent years an average of 350,000 tons nickel has been dug out annually. A total of more than 30 nickel mines are already in operation in the Philippines. The long term aspects for nickel are also attracting new potential investors. For example, Philex Mining Corp recently expressed interest in also getting into nickel in addition to its traditional portfolio of copper and gold mining. One of the biggest nickel miners in the Philippines is, however, the family led Nickel Asia Corporation with an annual output of about 16 million tons ore, which was, for the most part, intended for export to China and Japan.
Contrary to Indonesia, in the Philippines there is no distinct and downstream (refining) industry linked to mining, let alone integrated nickel and stainless plants. An exception in a certain senseare the Coral Bay Nickel Mining Corporation and the Taganito HPAL Nickel Corporation, operating since the early 2000’s and whose majority owner is the Japanese Sumitomo Metal Mining Corporation. Both produce a nickel and cobalt containing intermediate product using the High Pressure Acid Leach (HPAL) method, which is then sent to Japan for further processing and refinement to nickel and cobalt metals.
What happens next in Indonesia?
The destiny of Indonesia and its economic growth over the last few years has clearly been heavily influenced by President Joko Widodo, who has been in office since 2014. Since he took office, the gross domestic product has climbed by 43% and, with the exception of the Covid years, has reached an annual GDP growth of around 5%. One element of the growth comes from a number of infrastructure projects. Another part comes from foreign direct investments – above all, those from China and those in the expanded nickel value-added technology. After nickel as a raw material, ferroalloy and nickel in stainless steel the next promising step should be in the direction of nickel-containing battery manufacturing and EV production. A step which is much more challenging, according to the renowned “Economist”, than the establishment of the mining and steel industry. And also a step which the successor of Joko Widodo would have to take as his term of office ends in 2024.
LME (London Metal Exchange)
|LME Official Close (3 month)|
|October 16, 2023|
|Nickel (Ni)||Copper (Cu)||Aluminium (Al)|
3 Mon. Ask
|LME stocks in mt|
|September 13, 2023||October 16, 2023||Delta in mt||Delta in %|
|Nickel (Ni)||38,742||42,870||+ 4,128||+ 10.66%|
|Copper (Cu)||143,400||181,000||+ 37,600||+ 26.22%|
|Aluminium (Al)||491,300||486,600||– 4,700||– 0.96%|