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An Indonesian nickel producer has for the
first time ever applied to have its metal listed as a good delivery brand on
the London Metal Exchange (LME).
Indonesia has rapidly emerged as the new
powerhouse of global nickel production but until now has not produced the metal
in the high-purity form traded on either the LME or the Shanghai Futures
Exchange.
That will change if PT CNGR Ding Xing New
Energy gets the official nod for its “DX-zwdx” brand of full-plate nickel
cathode.
It is likely to do so since the LME is
fast-tracking new nickel listings as part of its recovery plan after the market
meltdown in 2022. The policy appears to be paying off for the exchange with
stocks and trading volumes rising.
For many other nickel producers, however,
it marks an ominous moment in the transformation of Indonesia’s growing
production dominance into exchange pricing power.
The reaction is building in the form of
growing calls for a premium “green” nickel contract.
Ding Xing New Energy has the capacity to
produce 50,000 metric tons a year of Class I refined nickel having mastered the
technology of converting Indonesia’s relatively low-grade ore into pure metal
form.
Many others, mostly Chinese operators, are
now building out similar new processing capacity in both Indonesia and China.
The LME has already approved four new
Chinese brands with another application pending. They bring a collective 91,600
metric tons of annual Class I metal capacity.
Rebuilding stocks liquidity is part of the
LME’s pathway to restoring confidence in its nickel contract after the
suspension of trading two years ago.
LME registered stocks have been trending
upwards since the start of the year, hitting a near two-year high of 73,992
tons at the end of last week. The volume of Chinese metal in LME storage rose
from zero in August to 7,884 tons at the end of January.
Rising inventory has been accompanied by
greater trading activity on the LME contract. Volumes surged by 74%
year-on-year over January and February. Open interest is also creeping back up
towards levels seen before the market suspension.
The previous price divergence between Class
I nickel and Class II products such as ferronickel has been closing as refiners
like Ding Xing convert surplus in the Class II segment of the market into
exchange-traded form.
But will the LME contract become a market
defined by Indonesian metal, or in the case of the newly-listed Chinese brands,
metal derived from Indonesian mines?
Princing power
Indonesia’s mined nickel production has
jumped from under 800,000 tons in 2020 to 2.03 million tonnes in 2023, when it
accounted for 55% of global output.
What happens in Indonesia already shapes
nickel’s pricing landscape.
LME three-month nickel is on a bit of a
roll right now, up by over 7% on the start of the year at a current $17,590 per
ton.
Underpinning the rally is Indonesia’s
backlog of new mine licence approvals, a bureaucratic logjam that threatens to
curb smelter production.
But the price bounce comes after a year of
sliding prices, which was also down to Indonesia’s supply surge.
Indonesian officials do not hide their
ambition to convert that market influence into explicit pricing power.
A price of around $18,000 per ton is about
right, opens new tab for Indonesia, according to Septian Hario Seto, deputy
coordinating minister for the mining sector. It’s high enough to allow most
local producers to make a healthy margin but low enough to keep nickel in the
electric vehicle battery chemistry mix.
That price, however, isn’t right for many
non-Indonesian producers. The last few months have brought a slew of closures
and writedowns in the face of low prices. Class II producers have to date borne
the brunt of Indonesian oversupply and have been particularly hard hit.
Fracturing the market
Australian iron ore magnate Andrew Forrest
is the latest industry figure to call on the LME to introduce a “green” premium
contract to complement its existing product.
Forrest’s Wyloo Metals will be shuttering
its Australian nickel operations in May to low prices.
A “green” contract would be a way of
differentiating Australian nickel from Indonesian nickel, which is cheaper but
comes with a higher carbon footprint due to the processing route from ore to
metal.
The LME today issued a notice to members
saying that it has no current plans either to launch a new parallel contract or
to change the specifications of the existing one.
It would risk fracturing the London market
again just as it is showing signs of recovery. Moreover, “the LME believes the
market for ‘green’ nickel is not yet large enough to support vibrant trading in
a dedicated green futures contract.”
A green nickel market?
This cuts to the heart of the “green”
premium debate.
Producers carrying the extra costs of tight
environmental compliance should not be put out of business by those with lower
thresholds. There is a strong case that such metal should be priced at a
premium.
But there can be no premium if buyers
aren’t prepared to pay one for “clean” metal, a choice that ends up with the
ultimate buyer of a new electric vehicle.
LME partner Metalshub plans for ‘green’
nickel price
Some big consumer brands pay up extra for
low-carbon aluminium. Austrian copper producer Brixlegg charges a green
premium, opens new tab on its recycled low-carbon metal.
But these are still outliers in the global
aluminium and copper markets and nickel is some way behind the broader “green”
premium debate.
Is there a market for green nickel? If
there is, the LME thinks “it is most effectively conducted through digital spot
trading platforms” such as LME partner Metalshub.
Metalshub has been operating a physical
procurement metals trading platform since 2016 and already calculates a weekly
European Duty Paid Nickel Briquette Premium.
The company will start reporting monthly on
the number of transactions and market value of its Class I nickel trade,
including a subset of brands with a registered carbon footprint lower than 20
tons of CO2 per tonne of metal.
The idea is that if there are enough
transactions, Metalshub could calculate a “green” nickel index, which could
then be the basis of a futures product.
It all depends, though, on how many buyers
are prepared to pay up for low-carbon, high-ESG nickel.