Nickel Supply and Demand

Date Added: April 8, 2019 | Comments Off on Nickel Supply and Demand | Filed under: Blog

The following text is extracted from Reflections, our monthly publication to customers and friends of Takota Asset Management

……mining companies maintain a marked preference for consolidating their balance sheets, soothing investors (dividends) and limiting capital expenditures at or around existing operations. What is still missing is a stronger appetite for exploring and developing new resources. While the above is true for many metals from copper to cobalt (and even iron), the metals for which the situation could become the most challenging are nickel first, then copper then cobalt. Looking at nickel, about 70% of the “new” nickel mined every year (“primary nickel”) is consumed by the stainless-steel industry, where nickel is necessary to bring ductility to the final product. This demand for nickel grows together with the demand for stainless steel, whose demand has been growing at an average rate 5.85% per annum since 1950 and at 5.4% over 2007-2017. While economic factors may affect year on year demand, the underlying growth trend remains powerful, driven by factors with considerable constancy: increasing world population, increasing urbanisation, and increasing standards of living (fig.1 next page). The balance of nickel demand (other alloys 17%, plating 9%, electric batteries 4%) grows at a slower rate than for stainless steel (about 3 % per year). Overall, nickel demand has grown over the period 2007-2017 at “only” 5% per annum in average. And in 2018, despite all the uncertainties, nickel demand still grew by 4.9%.

Furthermore, these historical growth rates do not account for the additional potential demand that will come from the electrification of transportation: electric vehicles demand batteries that require large amounts of nickel, cobalt, lithium, graphite, copper wires, tin for soldering etc. While quantifying this additional demand remains speculative as products and infrastructure remain to be created, there was a consensus at PDAC from both conservative and optimistic forecasters that their previous forecasts had been too timid, the market developing faster than they had thought. The gap between the most optimist and conservative forecasts remains wide by a factor of at least two, but the trend is definitively toward more bullish forecasts. Key in the development of the Electric Vehicle (EV) market is when it will become cheaper to own an electric vehicle rather than a gas engine one. This is the point at which we should see a marked acceleration of demand. Studies a year ago were pointing to 2025. Now 2023-2024 is seen as possible, accelerating the future demand for the required materials. Batteries in general (consumer electronics, vehicles, storage, etc.) currently account for only about 4% of nickel primary demand – but this will change. In 2018, sales of EVs increased by 65% over 2017, albeit from a low base and with a heavy concentration in China. For the period 2018 – 2025 estimated EV sales are expected to grow at a rate of 20-25% to 35-40% per year. Calculating the amounts of metal required to satisfy such growth depend on many assumptions around the chemistry and size (increased power, range) of the batteries that will be used. Nickel will also be required to build the infrastructure around these vehicles: electricity production, transmission, storage, charging. And more batteries will also be needed for other means of transportation (buses, trucks…) and electronic devices. It is therefore conceivably conservative to apply the low end of the above growth rate (let’s say 22.5%) to the current nickel demand for batteries to get a sense of future demand.

The only solution to this dilemma is higher metal prices. As the market’s awareness of coming potential shortages increases, prices will move up to balance expectations of supply and demand. But this is not enough: prices will have to become reliably high enough for capital to find financing mine developments acceptably risky.

For miners and current investors, it cannot come too soon.

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