Australia’s Paydirt, Issue 324
Nickel and lithium’s recent fall from grace share the same underlying driver – the non-linear nature of the EV build-out and its supply chain – but the individual levers in each commodity are different.
Amazingly this is the third time Indonesian supply has disrupted the global nickel supply/demand balance. Unfortunately for Australian miners, just as in Hollywood, the story gets worse with each sequel.
The Indonesian nickel horror trilogy started with the rise of the Chinese nickel pig iron (NPI) sector in the came in the late 2000s when Chinese stainless steel mills, invested heavily in technology and started importing laterite ore from Indonesia and the Philippines.
The Indonesian Government’s 2014 export ban on unrefined ore gave Australian nickel miners temporary relief, but the price was soon struck down again as Chinese producers, led by Tsingshan, moved their investment in NPI to Indonesia.
By 2020, the EV revolution was giving the Australians an advantage with their nickel sulphide concentrate more amenable to the battery chemistry than NPI.
Further, the London Metals Exchange (LME) continued to treat Class I nickel as a separate category with every other nickel product attracting extreme discounts.
Last year, everything changed. The LME decided to fast-track qualification for many NPI producers and their product, and Tsingshan developed more efficient ways of producing battery-grade product, fuelling a flood of new material onto the exchange, as BHP Ltd’s Hugh Mackay explained in the company’s half-year economic outlook.
“That brought the Class-II and intermediates surplus directly into line of sight of the broadly balanced Class-I trade, just as destocking in the battery value chain and weakness in OECD demand for stainless steel made the industry especially vulnerable to such a shift,” Mackay said.
“Since the LME began to take delivery of Sino-Indonesian nickel cathode to its warehouses, thus catalysing price convergence between product classes, loss-making has become widespread.”
At $US16,000/t, the WA nickel sector is operating largely under water. Both Federal and State Governments have stepped in to provide relief and support but will it provide longer-term solutions?
In a recent note, Gilbert + Tobin partner Justin Mannolini questioned whether the government support was “anything more than a ‘finger in the dyke’ response to what may prove to be overwhelming structural change in battery metals markets”. He cited Australian nickel’s higher cost environment and the fact the “green premium” Australian nickel miners were hoping to see has not, and may never, materialise.
Mannolini is right, Australian nickel miners have been waiting for bifurcation in the nickel market for some time and it is yet to emerge.
The obvious call would be to lower barriers to investment but no matter how much deregulation occurs, Australia will never be cost-competitive with Indonesia in energy and labour-intensive industries and the public would never allow environmental and social standards to be lowered enough to get even close to being competitive.
It is here where governments can have most influence. As national Resources Minister in a federal system, Madeleine King doesn’t have direct responsibility over the WA nickel industry but her Government can make an impact. It can pledge to fast-track critical minerals approvals by eliminating duplication and even providing state regulators with assistance in improving efficiencies. It can also push hard with allies and trading partners on the establishment of global principles around ESG performance and tracking it from pit to product.
In lithium, Australian miners are dealing with a slightly different problem. Here, the miners are in the lowest cost quartile, blessed as they are with hard rock spodumene sources of lithium. However, the likes of Pilbara Minerals Ltd, IGO Ltd and Mineral Resources Ltd have grown almost too quickly for the market. The midstream and downstream lithium sector is still dominated by Chinese firms, and they are unlikely to allow strongly performing Australian miners to keep growing to feed potential rivals in other jurisdictions. Better to dampen the prices for now and slow the growth rate of raw material supply, making it more difficult for downstream producers elsewhere to get established.
While the Australian critical minerals sector was asking existential questions, in Cape Town, there was little interest in short-term volatility.
It was slightly incongruous to wake in the morning to news from Australia that lithium and nickel had been battered again, only to arrive at a conference an hour later where the conversations of delegates from across the world was dominated by the opportunity critical minerals presents.
All of which says that the financial markets haven’t been able to solve the critical minerals supply chain problem for the West. The individual commodity markets are currently too shallow and immature for real money to flow into them. On the flip side, the end-use sector is failing to fulfil government ambitions for the EV rollout because there is not enough upstream capacity.
It all points to the fact that the West has got its entire strategy the wrong way around. It prioritised restrictions and incentives around EVs first, thinking that if demand was built, equity markets would finance the rest of the supply chain. Governments didn’t factor in the inherent risk in exploration and development or China’s massive head start. Instead, incentives should’ve focused on building the supply chains first.
As Newmont Corp Africa managing director David Thornton put it at Mining Indaba:
“If we’d been thinking about these minerals 15 years ago, they wouldn’t be critical now.”