Came to stay

LME and regulators need to speed up
After the turmoil in March and first attempts to start again in April, the nickel market on the London Metal Exchange (LME) is slowly coming into gear. For this author’s taste, a little too slowly. In particular, nickel is mainly heading in a southerly direction, as is the jargon on the exchange when prices are falling. This is, above all, due to two things: On the one hand, after the chaos prices were on an ambitious level, and on the other, expectations of global economic development have become somewhat gloomy. And so, the fall in prices down to the direction of levels from before the swift rise is not really very surprising.

However, according to unconfirmed reports by the news agency Bloomberg, the large position holder which, together with its bank and brokerage partners, caused the whole mess, is yet to buy back a substantial part of the short position. Depending on how it proceeds, this could certainly cause significant swings in the nickel contract on the LME where trading volume is still currently greatly reduced. And there is still no solution in sight for an end to the war in the Ukraine. And so the question regarding the availability of the legally or morally sanctioned 10% of world nickel production from Russia remains unanswered.

Therefore, whatever may be a fundamentally justifiable price level for nickel is, however, still far from clear. For, as far as economic expectations are concerned, hard though it sounds neither the Russian nor the Ukrainian economies play a significant role. Instead, the focus is on China where the zero Covid strategy and the combined harsh lockdowns have inadvertently led to a temporary recession. Since demand in China has been an important factor for a long time in the pricing of industrial metals, the correction (also in copper, aluminium etc.) has almost been expected. However, the analysts of J.P. Morgan make the conclusion that there can be a quick turnaround in this price trend when the lockdowns are lifted and demand recovers in China. Certainly by the summer it is expected that prices will start to recover.

There is something to be said for this point of view. However, analysts expressly exclude nickel from this, which can only be due to the fact that the nickel price had previously risen significantly sharper than the other industrial metals. There could also be a certain interest with the bank and one of its customers to buy back nickel. And lower rates would be more advantageous than higher ones. It could also be that the significant nickel price corrections of recent days have not yet been fully processed in analysis. Roughly speaking, one should not rely on a further decline of prices, at least in the short to medium term.

Currently nickel is trading on the London Metal Exchange (LME) at around USD 25,500.00/mt, if indeed the LME price is still taken as the internationally valid reference price. The LME and the regulators Bank of England and the Financial Conduct Authority (FCA) are required and obliged to quickly restore trust, which is certainly realistic. In this context there is also an important personnel matter to report, or rather to correct.

This January the LME had announced its long-standing CEO Matthew Chamberlain was leaving to go to a Blockchain Startup and an interim successor would take over, but on the 27th April 2022, the LME announced that Matthew Chamberlain would, however, now continue his role as CEO of the LME on a long-term basis. This would seem to be like a first confidence measure, for Chamberlain had saved the LME nickel market from collapsing permanently by his late, but bold intervention.

Inflation does not come out of nowhere
As well as the war in the Ukraine and the lockdowns in China, the strong US-dollar and especially the continuing high inflation are given as a reason for the feared weakening of the global economy. However, central banks, almost world-wide, did not initially seem to tire of qualifying price increases as merely temporary. This went on at least until it could not be denied anymore. Only the European Central Bank (EZB) which, as one senior banker quite rightly said, is doing a damn poor job, had difficulty for a long time in abandoning its line of communication, despite economic facts and obvious interest rate steps in the USA and Great Britain.

Rather, the war in the Ukraine, the Covid-19 crisis and the disrupted delivery and logistic chains provided numerous reasons to explain the causes of inflation. It is, however, not that simple, even if it is quite convenient for central banks to deflect from their own failures of the policy of cheap money. Since the financial crisis, central banks have been equally responsible with politicians in this. In other words: Not only are exogenous factors a cause of inflation, but, and to quite a large extent, the actions of central banks themselves are too. It is not without reason someone such as the former German Federal Bank President Jens Weidmann, a renowned representative of a monetary policy devised for monetary stability, has thrown in the towel in exasperation.

And now the genie which had been called up will not go back into the bottle. As expected, it seems the rescue measures which were necessary and indeed effective in the short-term after the financial and sovereign debt crisis, were not, however, free and without cost as central banks and governments, almost in unison, liked to suggest to the public. The economy boost of flooding markets with money and state financing via central banks was clung on to for far too long, and now is payment day. Low interest rates have created excess demand everywhere, especially in the construction, real estate and equipment sectors. And this flawed allocation is of course also largely responsible for the significant price increases in housing, commodities and building materials.

In the end, someone has to pay or it must be shared. Initially it was mainly the savers who were slowly expropriated through low or negative interest rates and who were forced to finance the rescue packages, now most of all inflation is reaching into the pockets of consumers. Wage increases will be a consequence, which will then also further fuel inflation, exactly the way in which the wage/price spiral is described in economic text books. But the trouble is that while interest rate increases are an effective way of combating inflation, they come with the cost of weakening economic activity.

Over the last few years there have been plenty of opportunities to raise interest rates, but of course, low interest rates were much more comfortable and without conflict for those responsible. And higher interest rates would have enabled central banks to be in the position at last, to be able to lower them again once the situation demanded it. Now, however, interest rates have to be raised in order to dampen the economy, although the environment might require otherwise. So the spectre of stagnation seems almost unavoidable.

The role and responsibility of central banks and politics is even today discussed far too little by the public and the media. Caution is now also advised against simple measures to cushion and alleviate inflation. Politics is simple, but not just cybernetic and network thinking teach us that if one wheel is turned, then at the same time, numerous other wheels turn and so in turn flawed allocations and undesirable side effects quickly occur. But one thing is and remains definite, that in the end the taxpayer always pays the bill.

Nickel demand grows in 2022
The International Nickel Study Group (INSG) published a press release on 27th April 2022, wherein was stated that the global production of primary nickel will probably increase from 2.608 million tons in 2021 to 3.082 million tons in 2022. The increase of around 18 percent is mainly due to production increases in Indonesia and China. Nickel demand is expected to increase to 3.02 million tons in 2022, from 2.78 million tons last year.

Approximately 85 percent of nickel produced is needed for the stainless steel and other alloys industry. The use of nickel in battery production, according to a publication of the German Commodity Agency (DERA), is currently about five percent. The forecast of the INSG for both sectors is for a positive growth this year, whereby nickel consumption for battery production will dynamically and significantly increase more than the consumption for stainless steel production. While there was still an implicit market deficit of 168 thousand tons in 2021, the INSG expects a surplus of 67 thousand tons in 2022.

The origin of nickel is decisive for sustainability
While stainless steel is impressive above all through its physical characteristics, the hope for electromobility lies in its climate friendliness. A few days ago the information service S&P Global Commodity Insights, formerly known as Platts, reported on an interview with the CEO of the Finnish mining company Terrafame, Joni Lukkaroinen, who expressed his concerns about the sustainability of nickel pig iron. While there may be enough nickel world-wide, Lukkaroinen put into question about whether there is enough sustainably produced nickel sulphate available for battery production. At the moment, the production of one electric vehicle uses approximately 5 g/km more carbon dioxide during the entire product life cycle than a conventional vehicle. Should, however, NPI be extensively used for battery production, then the CO2 usage would increase to 35-50 g/km. The CEO of the Finnish state owned company states that electromobility would be more harmful then to the environment than diesel technology.

Since July 2021, Terrafame has been building a works for the production of sustainable battery chemicals and has already signed a cooperation agreement with the French car manufacturer Renault, in order to produce nickel sulphate for battery production responsibly and transparently. The capacity of the new plant will be for about 1 million batteries per year. Therefore, the warnings of the Finnish CEO are understandable, of cheap nickel pig iron presenting a real threat to building sustainable capacities.

The ecological challenges in battery production have also already been recognised by German car manufacturers. For example, at the end of April well-known German companies such as BASF, BMW, Mercedes and Volkswagen, as well as the Fraunhofer Institute, announced their intention to introduce a battery passport. The “Made in Germany” battery passport project should set standards ranging from the sustainability of the supply chain, information about battery content to recycling capabilities. Through seamless documentation, an instruction manual for recycling should also be recreated which shows how much exposure a battery has had and whether further use in another project can be considered. The German government is funding this initiative with 8 million Euro.

The aim of the project group is to develop a battery passport which already fulfils the criteria of a planned EU directive, which should come into force in 2026 and drive forward a circular and climate neutral economy.

The mining industry plays a central role in energy change
The car industry’s focus on a sustainable supply chain is a praiseworthy venture. Yet, it is worth highlighting the positions of mining operators in relation to climate change, as the Reuters journalist Clyde Russell has recently done.

Due to huge demand in raw materials for energy change and the simultaneous restructuring of the mining sector for more sustainability, the challenges of mining companies are immense. Added to this, investors do not always recognise that the climate change must already be tackled at the start of the supply chain and not just when an electric vehicle is produced. Furthermore, investors are not inclined to invest in mines, since new projects often come full of risk. Eventually capital has to often be invested in conflict ridden regions where authorities do not always offer legal assurances and local initiatives can be unpredictable.

Investors increasingly prefer to reduce their ecological and social footprint in society and economy world-wide when making capital investments. Serious providers of sustainable financial investments are, therefore, applying verifiable environmental, social and corporate governance criteria to their investment portfolios. In the financial world the abbreviation ESG has become common place, standing for Environment, Social, and Governance. However, even environmentally acceptable mining projects are turning areas into moonscapes with waste dumps and so at first glance do not seem compatible with the ESG criteria.

Consequently, despite the high importance of mining for climate neutrality, numerous investors have scorn for investments in the mining sector due to the ESG criteria. With a look at raw materials needed for climate neutrality, this is really a misconception. Clyde Russell concludes that this is a reason why a company such as Tesla is much more preferred by investors rather than a listed mining operator. On the other hand, one does read more and more that Tesla itself is open to investment in, for example, a nickel mine.

CME Group sees market potential for its own nickel contract
At the beginning of the month, citing two unnamed sources, Reuters news agency reported on the plans of the world’s biggest futures market CME Group to develop its own nickel contract. Representatives of the Chicago based commodity exchange are speaking with market participants about the potential of a hedging instrument, to hedge the costs for battery production, for example. As it stands, the business partners of CME seem open to an alternative to the LME which, in the last few months, has lost a lot of trust.

At the moment only the Shanghai Futures Exchange (SHFE) offers an alternative to the LME for nickel hedging, whereby trade on the SHFE for non-Chinese companies is only possible via a Chinese subsidiary. On top of this, prices on the SHFE are quoted in Yuan and not in US-dollar as is usual on the LME or CME.

The only thing known so far about the structure of the contract under consideration by the CME is that the contract settlement will be made by financial compensation, which means that the CME, contrary to the LME, does not intend to have any physical deliveries for settlement of the futures. Furthermore, it is speculated that nickel sulphate will be traded and not pure nickel.

The CME group was formed in 2007 after the merger of both commodity exchanges, Chicago Board of Trade (CBOT) and Chicago Mercantile Exchange (CME). The history of the latter goes back to 1898, when the CME formed under the name of the Chicago Butter and Egg Board. This was because in those early days only two products were traded, butter and eggs. The lot sizes were determined by the capacity of the transporting vehicle: 1 lot of butter corresponded to 19,200 pounds.

In the following decades, the commodity exchange successively increased its portfolio to over 50 products, which also included pork bellies and potatoes. In the 1960’s the original contracts for butter and eggs ceased to exist after the products became less dependent on seasonality. Nowadays the CME offers, among other things, a future for copper which is in direct competition with the copper contract on the LME.