Elevated LME nickel prices are resulting in some Chinese producers targeting the production of high value, exchange deliverable nickel products.

The London Metal Exchange’s (LME) recent approval of full plate nickel cathode, produced by Quzhou Huayou Cobalt New Material (a subsidiary of Huayou), was unique. This is because the exchange first received an application to list from Huayou on 9 June 2023, and took a little under six weeks to be granted. The significance was that it represented the first fast-track approval since the LME recently reduced waiting times and scrapped fees for listing new nickel brands. Traditionally, producers that seek to list on major exchanges endure a thorough registration process that can take years with strict guidelines relating to quality, grade, shape and weight. The record time in which this approval was conducted seemingly demonstrates the LME’s eagerness to boost liquidity on the exchange since the infamous short squeeze difficulties of 2022.

The nickel market is, at present, in a large surplus with most of this in the form of nickel pig iron (NPI) and nickel sulphate, which are currently undeliverable against the LME nickel contract. Of the total refined (finished) nickel, currently only 25% of this is Class I (>99.8% purity), a form that could be delivered on the LME exchange. A decade ago, it accounted for half. The decline in Class I nickel output since then was, in part, the result of closures to a number of plants that struggled during several years of anaemic prices. More significantly, it represents the rapid evolution over the last decade of the type of nickel required by the main growth area of the market: the Chinese stainless steel industry and the simultaneous growth in Chinese-invented nickel pig iron (NPI). NPI is produced both in China and, to an ever-greater extent, Indonesia. NPI’s surging output has seen Class 2 nickel, traditionally consumed by the stainless steel sector, dominate recent refined nickel growth. Additionally, nickel sulphate output continues to rise sharply to target the growing EV battery market.

In comparison to the glut of Class 2 material that weighs on the market, Class I supply is much tighter with LME nickel inventories at their lowest levels since 2007. This feature has been a major driver of the recent price volatility and detachment from market fundamentals since the exchange halted nickel trading after the major short squeeze in March 2022. Put simply, the LME nickel price does not reflect the vast majority of recent nickel supply growth. As such, the LME now hopes that Huayou’s listing will increase nickel inventories on the exchange, thus boosting liquidity.

The development seems likely to pave the way for a surge of Class I nickel to hit the exchange as several Chinese producers look to follow Huayou’s example by taking advantage of higher refined nickel prices on the LME compared to lower-grade NPI and nickel sulphate. It also offers Chinese producers increased access to international markets and provides the ability to hedge with futures. This option is also particularly attractive given the favourable economics of producing Class I nickel forms from matte based on converted NPI. NPI has traded at large discounts of between 30-40% to LME prices during 2023 and a wave of intermediates from Indonesia, suitable for refining to LME deliverable products, could swell inventory levels.

Earlier this year, Tsingshan was reported to be in talks with several struggling copper smelters in China to explore the potential of repurposing them to produce refined nickel metal. Other Chinese producers of nickel including GEM and CNGR Advanced Materials are also launching production of nickel cathodes in China and Indonesia. Battery material producers including Jutai Energy, Grand Green and Maolian Technology were also reported to be considering applying for LME listing.

After a tumultuous 2022, the nickel price normalised through the first half of this year before fluctuating between a US$20-22,000/t range since June. China’s stuttering economic recovery has hindered any meaningful uptick in stainless steel demand and oversupply is starting to weigh on the nickel price. Given the tightness of the Class I side of the market, additional nickel metal entering the market should support a bearish view on prices as lower price forms of the metal drag down refined nickel prices to reduce the spread. However, considerable upside risk remains over the ability of these producers looking to list on the LME to consistently match the strict quality criteria demanded by sectors consuming the highest purity material (superalloys, plating etc). This could yet justify prices stabilising around today’s levels.