In a surprising turn of events, the nickel market, once considered a key pillar of growth for major mining companies like BHP Group, is now in a state of chaos. The euphoria around nickel, driven by its crucial role in electric vehicle (EV) batteries, has given way to a supply glut, collapsing prices, and a potential reshaping of the global nickel industry.
Just 18 months ago, BHP Group was riding the nickel frenzy, striking a deal with Tesla Inc. to supply the essential ingredient for EV batteries. Nickel was seen as a future-facing commodity, aligning with BHP’s strategy to offset its exit from fossil fuels and tap into the growing demand driven by the global push to decarbonize.
However, the nickel market dynamics have swiftly shifted, primarily due to a flood of new supply from Indonesia. This surge in supply is a result of substantial Chinese investment and significant technological breakthroughs. The Indonesian expansion focused on low-grade nickel production has created a surplus, but innovative processing methods have refined this glut into a high-quality product that is saturating the battery market.
As a consequence, nickel prices have crashed over 40% from a year ago, presenting significant challenges to an industry already grappling with weak demand and concerns about China’s economic stability. According to Macquarie analysts, over 60% of the global nickel industry is currently operating at a loss at these prices.
The magnitude of the collapse has raised doubts about the future viability of most nickel mines outside Indonesia. This situation has also intensified concerns among US and European policymakers about China’s dominance in key commodities, with Chinese companies leading much of Indonesia’s nickel production.
Tom Price, Head of Commodities Strategy at Liberum Capital Ltd., highlighted the vulnerability of high-cost nickel assets, stating that mines in Western Australia and the French territory of New Caledonia are likely to be the most at risk.
In New Caledonia, once considered a future hub for nickel production, the French government has intervened to prevent essential mines and plants from closing, recognizing their significance to the territory’s economy. Talks are underway with key shareholders of processing plants to secure a rescue deal, but no breakthrough has been achieved so far.
Australia, too, has not been immune to the challenges in the nickel market. BHP is currently reviewing the future of its flagship Nickel West mine in the country. Panoramic Resources Ltd. has suspended a key mine after entering voluntary administration, and several other mining operations, including those by IGO Ltd. and Andrew Forrest’s Wyloo Metals Pty Ltd., are facing closures.
The mining industry in Western Australia has turned to officials for assistance. Miners have requested tax credits for downstream processing during a crisis meeting, seeking government support to navigate the challenging market conditions.
Despite production cutbacks starting to impact the industry, immediate relief for nickel prices appears unlikely. Allan Ray Restauro, an analyst at BloombergNEF, anticipates that the flood of supply from Indonesia will continue to exert downward pressure on prices in 2024.
The Indonesian production boom, accounting for half of the global nickel supply, may prove resistant to output cuts. The nation has become a global nickel hub, attracting substantial investment in efficient plants benefiting from low-cost labor, inexpensive power, and readily available raw materials.
However, concerns have arisen about the environmental impact of Indonesia’s rapid expansion, with much of its production relying on coal-powered energy, resulting in higher emissions per ton compared to rival producers. The deforestation associated with this expansion has also drawn criticism.
Mining companies, including BHP, had hoped that buyers paying a premium for so-called green nickel would help lift prices. However, the reality has been different, with automakers remaining content to buy Indonesian nickel.
The future of nickel mines globally now hinges on a sustained recovery in nickel prices. As Tom Price from Liberum Capital emphasizes, only a revival in nickel demand can potentially prevent further mine closures and project shutdowns. The industry is in a delicate balancing act, grappling with the aftermath of an unforeseen supply surge and seeking a path forward in an evolving nickel market.
