Tesla boss Musk's desire for more nickel could be a non-starter
Elon Musk faces something of a reality check after his call
this week for more nickel mines to feed the batteries that Tesla and other
carmakers need to power their electric vehicles.
The market’s fortunes remain beholden not to the battery
supply chain but to the much larger stainless steel sector, and nickel prices
are hovering around levels that are more likely to force out existing operators
than entice new ones.
And it is concern about the state of the stainless steel
market that is dampening nickel’s prospects.
“Tesla will give you a giant contract for a long period of
time if you mine nickel efficiently and in an environmentally sensitive way,”
the electric car company’s charismatic leader told a post-earnings conference
call.
Musk’s enthusiasm for new supply is understandable, though
telling the market that you are looking to buy huge tonnage is unusual consumer
behavior.
Maybe Mr Musk is simply doing his bit to push up the price
to a level where new projects will be incentivised, given that nickel could do
with a helping hand.
Nickel has been dragged higher in the broader base metals
recovery, but it is one of the laggards within the LME suite. Currently trading
at $13,435 as the Tesla tremor fades, it is down 5 per cent since the start of
the year.
It’s not difficult to see why.
The International Nickel Study Group (INSG) estimates the
global refined market was in a supply surplus of 57,300 tonnes after the first
five months of the year, representing a sharp turnaround from a deficit of
31,500 tonnes at the same point of 2019.
The median forecast in Reuters’ July analyst poll is for a
surplus of 100,000 tonnes in 2020, making it the first year of oversupply since
2015.
LME nickel stocks are plentiful at 234,636 tonnes and LME
time spreads continue to trade in comfortable contango, contrasting with a
tightening trend in other metals, such as copper.
Nickel supply has not been unaffected by the wave of
lockdowns that followed COVID-19 around the world.
Global mine production fell by 10 per cent in the
January-May period, with the Philippines – a major ore supplier to China’s
nickel pig iron (NPI) producers – recording a sharp 14 per cent slide,
according to the INSG.
Refined production fell in several countries, reflecting
lockdowns in Canada and in Madagascar, where Sumitomo Corp has just booked an
impairment charge on its Ambatovy operations.
Ferronickel producers also lowered production in the face of
steep discounts to an already low outright nickel price.
However, global refined production was still up 1% for
January-May thanks to growing output of NPI in Indonesia, where the mining and
processing sector appears to have been relatively untouched by the coronavirus.
Indonesian production surged by 55% year on year as
construction of new processing capacity continues unabated.
The incentive comes from a government ban at the start of
this year on exports of unprocessed nickel ore.
It’s noticeable that Chinese imports of Indonesian ore were
only 202,000 tonnes in April and May, while imports of Indonesian “ferronickel”
totalled 380,000 tonnes.
The continuing trend of Chinese NPI capacity moving offshore
to Indonesia also continues, it seems.
While Indonesia has held global production steady over the
first part of this year, consumption everywhere else has taken a hit. The INSG
estimates global usage fell by 8 per cent year on year for the January-May
period.
The point of maximum weakness has been the stainless steel
sector, which still dwarfs electric vehicles in terms of nickel’s usage
profile.
Stainless steel output tumbled 8 per cent in the first
quarter, the International Stainless Steel Forum (ISSF) says.
Production fell by 9 per cent in China, the global stainless
powerhouse, and by 7 per cent in the rest of the world – the first synchronized
downturn since the fourth quarter of 2018.
Stainless steel’s exposure to coronavirus-hit sectors such
as hospitality (cutlery), oil and gas (pipes) and aerospace creates
considerable headwinds for the nickel market.
Overproduction by Chinese stainless steel producers fighting
for market share might mitigate the nickel hit, but only at the expense of a
build in stocks further down the chain.
“Delayed cuts from stainless and alloys, the resulting
product overhang and slow recovery of certain end-use sectors is expected to
drag out a multi-year surplus,” says Citi, which is very much in the bear camp
of analysts. (“Q3 Commodities Market Outlook,” July 2020)
But the current price is pretty much saying the same thing.
One of the reasons cited by Sumitomo for its Ambatovy writedown was “the
decline in mid to long-term nickel price outlook.”
Tesla’s Musk doesn’t care about stainless steel or those
forms of nickel that go into making it. Like other car companies, he needs
battery-grade nickel, which is a subset of the many forms nickel can take.
And he’s probably right to be worried.
There is no shortage of new projects in the planning
pipeline, but the main hindrance to development is the current muted nickel
market.
Though the pressure is most acute for those most dependent
on the stainless sector, such as ferronickel operators, producers of
battery-grade nickel are not being spared.
Nickel’s battery story continues to attract much investment
interest, to judge by the social media reaction to Musk’s comments, but it
remains trapped in a stainless steel mesh for now.
Elon Musk may want more nickel mines, but it’s the stainless
sector that will decide if he gets them.
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