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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?
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.
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.”
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.
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.
(The opinions expressed here are those of the author, Andy Home, a columnist for Reuters.)
(Editing by Marguerita Choy)
Related: Indonesia and China killed the nickel market
Comments
Jack Davis
It is possibly a dangerous assumption to make, that ‘our’ nickel production is greener than ‘theirs’. Producers would have to prove it with a full audit of both competing operations. The crux of the problem is the innovative and more efficient processes the Chinese have developed. That’s where Western producers should be applying themselves in order to remain competitive.