Outspoken Australian iron ore billionaire and environmental crusader Andrew Forrest is one of the investors stuck in what could be a long downturn for nickel, a metal which was expected to be a winner from the electric vehicle (EV) revolution.
Rather than seeing the price rise with demand nickel, which is used in the batteries of EVs as well as making stainless steel, has crashed, down 45% over the last 12 months.
Iron ore billionaire Andrew Forrest has a nickel problem.
The cause of the collapse is as simple as supply exceeding demand, a problem experienced by all commodities whenever enthusiasm morphs into irrational exuberance.
But the worst of the nickel crisis could be passing with Morgan Stanley, a leading investment bank, seeing a “floor” forming in the price because “most of the downside is now behind us”.
That doesn't mean there will be a quick recovery, or that more production cuts will not be required. The comment refers to the price stabilizing around a depressed level of $15,500 a ton, roughly half the $30,000/t in late 2022.
As well as being a conventional supply/demand commodity crash the nickel wipe-out was magnified by a mistaken belief held by people such as Forrest that there is a buyer-driven bonus available based on environmental credentials.
No green bonus
His theory is that “green” nickel produced in Australian and Canadian mines should attract a price premium over what he calls “dirty” nickel produced in countries such as Indonesia where miners scoop up near-surface low-grade ore, damaging forests and generating pollution during processing using coal-fired electricity.
If correct, the Forrest theory would see EV makers demand his “green” nickel for use in the batteries of their environmentally friendly vehicles.
In reality, EV makers do not seem to see a difference in nickel which is just one component of a battery, along with graphite, copper and other material.
EV battery production in China. (Photo by STR/AFP via Getty Images)
The failure of a green premium to develop has seen traditional nickel miners exposed to new and low-cost Indonesian competition based on Chinese developed technology to flood the market.
The resulting price crash has seen Forrest forced to announce the closure of nickel mines near Kambalda in Western Australia which were acquired just eight months ago for more than $500 million.
Other mines, including the Savannah project of Panoramic Resources, the Cosmos mine of IGO and the First Quantum run Ravensthorpe mine have been closed or are reducing output in the hope of a price recovery.
Morgan Stanley, in a note sent to clients late last week, said the 45% price drop is starting to drive supply curtailments suggesting that the price is close to finding a floor.
More cuts needed
“However, more cuts are still needed to erode the 200,000-ton surplus we model for 2024, and a more robust demand backdrop would be needed for a meaningful price upside,” the bank said.
As well as the modeled surplus there is another estimated 253,000 tons of nickel said to be “at risk” because its cost of production is close to the current price.
“Nickel was the worst performing base metal in 2023, falling 45% year-on-year,” Morgan Stanley said.
“However, with the price stabilizing and supply cuts emerging, investors are asking if we are close to a trough.
“This looks increasingly likely in our view, with the spot price now at the 75th percentile of Wood Mackenzie’s cost curve. Historically, the nickel price has troughed at the 70th percentile, followed by a subsequent rebound.
“We still see some pressures on the demand side, with subdued global stainless-steel output and rising LFP (lithium iron phosphate) market share within EV batteries, but expect prices to bottom around our second quarter target of $15,500, or above.”
