What comes after Generation Z?

Nickel market would be more efficient with a clear reference
Since the middle of May nickel prices on the London Metal Exchange (LME) have weakened even further, but only by “a little”. The biggest part of the downwards movement, from the relatively high levels at the beginning of the year and after an interim high in February, with prices of over USD 30,000.00/mt in each case, has already taken place. Since then there has been a bottoming out. The base metal is trading mainly in a relatively tight range, between USD 20,500.00/mt on the downside and USD 21,500.00/mt on the upside. Recently, it would seem that market participants have gained more confidence again after the Chinese central bank, among others, by reducing the short-term financing rates after an abstinence of 10 months, set a first sign that it does not want to passively tolerate the weakening economic development. This would, however, also refute circulating fears that the Chinese government could already be satisfied with a forecast growth rate of 5%.

Perhaps there could also be a hint here about further and similar steps in longer-term financing costs and also that there are more stimuli in the Chinese pipeline? At least this type of “choreography” has been seen many times in the past. In addition, inflation in the USA continues to weaken, which should actually at least delay proposed interest rate increases and help soften the US-dollar a little against other currencies. In this scenario the 3 months nickel contract, at the time of printing, is above the trading range with a price of around USD 22,500.00/mt.

Overall it can indeed be said that the correction in nickel prices in particular, and the economic development in general, are determined more by previously possibly exaggerated positive expectations rather than by a new pessimism. Regional and global challenges still remain and China’s opening following the rigid lockdown-measures have not (yet) brought about the economic revival which had been hoped for here. Therefore, the central bank is now also acting.

Commerzbank warns against misjudgement
The commodity analysts of the Commerzbank are, however, warning that the situation of nickel on the LME should not be underestimated, for the supply situation of class 1 nickel, in their view, continues to be tight. Excess supply, partly only claimed, is mainly in other segments of the nickel market. And in addition, these sources are not even open to all global nickel consumers. For example, Indonesian NPI (nickel pig iron) or ferronickel is consumed also exclusively in China and Indonesia. An actual arbitrage of other nickel or stainless steel scrap prices with the NPI price can, therefore, not take place at all.

Indeed, it must be said that the market turbulence in the nickel market at the beginning of March 2022 and the subsequent reactions of individual market participants have, unfortunately, brought about a high level of disorientation. A universally recognised reference is still missing. Everyone is trying to make their own sense of it and, therefore, market power and opportunism presently have a greater role than before when, basically, price formation was driven by supply and demand with individual premiums and discounts depending on form and quality. How can fix and inclusive prices meaningfully develop when there does not seem to be any sort of reference.

The market’s efficiency has definitely weakened, and it has all gone quiet regarding the grandiose announcements at the start of the year, for example those of Global Commodities Holdings (GCH) relating to alternatives to the LME. Possibly because such alternatives are not needed after all? There is certainly no question that the LME nickel market (and also the same on the Shanghai Metal Exchange) lacks massive liquidity, but this is at least being worked on. And more trading places would only cause further fragmentations in volumes which are already too low. However, for times to come, the LME could also consider a nickel future which has to represent other nickel materials that have a bigger share of the market than class 1 nickel.

Attention should also, however, be given to the rumours that the Chinese-Indonesian nickel and stainless steel producer Tsingshan, or better said a Chinese controlled company, is increasing its nickel short positions on the LME. It is assumed that the intention is to lower nickel prices in order to reduce the share of value creation remaining and taxed in Indonesia opposed to the share which is exported to China and taxed there. However, unlike in March 2022, Tsingshan is now supposed to possess sufficient reserves of LME-deliverable nickel which, in an emergency, can be used to serve the short positions. Hard to believe, and whether this is actually true is something which the LME has to check undoubtedly.

World Bank sees better 2023 but forecast weaker for 2024
At the beginning of June the World Bank published its latest growth prognosis for 2023 and 2024. While the economists, in the expectation of higher key interest rates and tighter credit lines, reduced their forecasts for global economic growth in 2024 from 2.7% to 2.4%, they increased the outlook for 2023. Now a growth of 2.1 % is expected, a good 0.4% point higher than in January. The economists base this improved outlook above all on a stronger US-American labour market and domestic consumption and on the opening of China after the lifting of corona restrictions (see also above). It was only at the end of 2022 that China started to phase out its strict corona protection measures. The experts of the World Bank now see China’s gross national product climbing by 5.6% in comparison to the previous year, 1.3% points higher than in January’s outlook. Expectations for Europe were upped from stagnation to a light plus of 0.4%.

However, forecasts have to be first achieved. For example, in the first quarter of 2023 China’s economic growth was only 4.5%. At the moment, in most of the regions of the world including China, the manufacturing industry is stuttering. While the official Caixin Purchasing Managers’ Index, an indicator for activities in the manufacturing sector, improved in May to almost 51 points (compared to 49.5 in April) foreign trade data was disappointing and showed a decline in May of 7.5% compared to the previous year. In addition, the real estate sector in China continues to remain weak, which is why there is renewed speculation circulating about state sponsored stimulus packages.

Is the global economy facing “Peak China”?
The renowned British “Economist” recently even took China’s present economic situation as an opportunity to ask whether “Peak China” had now been reached. For over four decades China’s extraordinary growth has had an effect on the global economy. Factors such as an aging population structure, and therefore in the long-term a decline in the available workforce, and lower productivity increases, less infrastructure spending and last but not least a broader positioning of international supply chains and a reduction of dependence on China lead, in the long-term, to a weakening of economic potential.

A good decade ago Goldman Sachs, the inventor of the BRICS theory, had still forecast that China would economically rush past America at high speed in 2026. This forecast has been scrapped in the meantime. A more recent forecast now considers the year 2035 as a possible point when both economic powers may become equally large. And this is with a significantly flattened gradient of Chinese growth. “Peak China”, according to the Economist means adjusting in the medium-term to China and America having similar economic strengths.

Not everything is as green as it seems
Climate protection needs raw materials – but in order to acquire these raw materials, how does this comply with the issue of sustainability and above all the ESG aspects – Environmental, Social and Governance? Electromobility in Europe has been made into a cornerstone of energy transition. Electric vehicles contain batteries which are produced using metals such as cobalt, and also nickel. The addition of nickel leads to a higher energy density of the battery and therefore in turn to a wider range of the vehicle. In order to cover the demand for the necessary battery-grade nickel Indonesia plays a role as it is the country with the largest known nickel reserves. On a regular basis in the press it can be read about well known OEMs such as Tesla, Ford, and Volkswagen etc. entering into related cooperation agreements or long-term delivery contacts with raw material producers.

However, the production of battery grade nickel is technically demanding. A possible process route is a hydro-metallurgical process which is known in English as High Pressure Acid Leach (HPAL). This is a leaching method in which nickel and possibly other metals are “recovered”, so to speak, from ores utilizing elevated pressure (>40 bar) and high temperatures (>200°C). The problem here is not only a basically higher investment volume or the technological risk inherent in the process, but also one of a sustainable handling of process residues: in the processing of one tonne of ore using this method, there is typically a contaminated residue of around 1.5 tonnes. These residues must be disposed of appropriately. In addition the further refining into marketable raw material products requires a huge amount of energy which often does not come from renewable sources unfortunately, but from coal fuelled power stations.

Basically, it is becoming clear that the robustly rising demand for raw materials, such as nickel, is combined with a higher ESG risk from mining and processing. That which has been long known to experts and industry insiders is, in the meantime, finding a wider audience. In a recent article published in the Washington Post the authors look behind the scenes of the global boom in electric vehicles. They show what it means for the environment, the population and for the workers in the mining countries, such as Indonesia, to meet the current and future demand for raw materials like nickel.

Can the car industry, also still in the shadow of the diesel scandal of not too long ago, afford to close its eyes to the obvious ESG risks which are coupled with massive nickel mining? Appropriate requirements and guidelines are necessary here to encompass the whole ecological footprint: from carbon emissions, via the treatment and disposal of mining waste to the environmental impact assessment, also with regard to biodiversity. With the rapid growth of the nickel industry in Indonesia and the associated economic benefits for the country and its people, the relevant aspects appear to have fallen short in one or more places. It is clear that correspondingly high standards will lead to higher costs in nickel production in Indonesia. In this context it should be mentioned that there is already a recycling industry for electric car batteries being set up in some countries.

Generation AA
Here is another thought, which does not necessarily have anything to do with the commodity markets directly, though it might possibly do in a roundabout way. There is a lot of talk and sometimes even discussion, especially in Europe and America, about Generation Z and its new set of values. It is clear that Generation Z (sometimes also simply referred to as Generation Cargo Bike) will, in the not too distant future and simply as a matter of time, be the presiding force in political, economic and social office. It will also be even before then that they will compare their demands and ideas with the realities and experiences and leave their mark on future developments.

However, without debating here the pros and contras which there always are, another, totally technical question arises in this connection. Which generation actually follows on from Generation Z? Or does the world come to an end then? Or will there be just a continuation of the Z Generation? Z is the last letter in the Latin or Roman alphabet. Will another alphabet be used and then perhaps Generation Alpha according to the Greek alphabet can be used, or Generation AA and then AB, like in Excel software? If somebody now thinks, or says out loud, whether that is really the only problem which we have to deal with at the moment, then this statement is certainly absolutely correct.