(Opinion from Bloomberg) — Here’s a notable aspect of the short squeeze that briefly caused the nickel price to quadruple in 48 hours earlier this month: The player squeezed to the point of making billions of paper losses every day is the world’s largest producer of nickel, Tsingshan Holding Group Co.
Such an outcome is somewhat like the fact that Exxon Mobil Co. caught on the wrong side of the oil market. A short squeeze only works on a trader who is unable to cover his position, forcing him to buy back contracts at ever-rising prices in a market where supply is disappearing. Tsingshan should be immune to that problem. The company aims to produce 850,000 tons of nickel this year. Short-term interest rates across the London Metal Exchange on the eve of the squeeze were little more than half that amount. If Tsingshan’s billionaire owner Xiang Guangda wanted to avoid those disastrous costs, all he had to do was supply nickel from its factories in Indonesia to LME warehouses in Singapore and Malaysia.
At least that’s the theory. The problem is that not all nickel is created equal. Tsingshan made a name for itself by producing not the highly refined plates and briquettes traded on the LME as Class 1 nickel, but nickel pig iron or NPI – chunks of low-grade metal that can be fed into electric furnaces as an inexpensive way to stainless steel, the destination of about three quarters of the world’s nickel. That helps explain why Tsingshan was unable to hedge its trading position. Although it produces a lot of nickel, almost nothing is of the high-quality kind accepted by the LME.
That’s an issue that extends well beyond this month’s trade turmoil.
A few decades ago, Grade 1 metal was overwhelmingly the most useful way to get nickel into steel, alloys, galvanization and the array of other minor applications in which it is used. But refining a metal from ore to 99.8% purity before alloying it to lower concentrations can be a wasteful and cumbersome way of going about things. After nickel last rose to $51,600 per ton in 2007, Chinese metallurgists turned to NPI, which has similar concentrations of elements to finished stainless steel, as an inexpensive but emission-intensive way to churning finished metal.
That revolutionized the nickel market in the 2010s and led to an explosion in production from Indonesia and the Philippines, whose low-grade ores are not well suited for refining into Class 1 metal.
The same process is now underway with battery materials. Nickel 28 Capital Corp. predicts that demand for electric cars, which was barely worth it a few years ago, will rise to about 1.3 million tons by 2030, equivalent to about half of last year’s production. Miners and battery companies are again trying to bypass Class 1 metal: BHP Group produces nickel sulfate crystals from its mines in Australia, while Tsingshan and other Chinese companies have developed mixed hydroxide precipitate or MHP, a product rich in the battery elements nickel and cobalt .
What is the role of class 1 nickel in a world where the two largest end markets are supplied by alternative products? It’s not nil: Due to its high purity, Class 1 can act as a swing product of sorts, with the versatility to make up for shortages in the stainless steel and battery materials market when NPI and MHP are not available in sufficient quantities. The uniformity also makes it easier to trade alternative products. NPI and MHP are typically priced at a discount to the refined metal, adjusted for their chemical composition, ease of processing and transportation costs.
That is not an unusual situation. Most of the crude oil in the world is not the light, sweet type on which the Brent and West Texas Intermediate contracts are based. Most metals are traded not as refined cathodes and briquettes, but as powdery concentrates and mats that are almost as diverse as the rocks from which they are processed.
Still, benchmarks that don’t reflect their market quickly lose their usefulness. Within the span of a few decades, Class 1 nickel has fallen in value from roughly two-thirds of the world’s nickel mined to about one-third. That number will continue to fall as battery connections take up an increasing share of demand. Metal producers and consumers don’t want their cash flows held hostage to the fluctuations of an illiquid commodity that they barely trade.
Solving that problem will not be easy. Class 1 nickel may be illiquid, but the less refined products that could challenge its role as a benchmark are not traded in volumes large enough to displace it, especially when you consider the drawbacks of their less standardized nature. Nickel is unlikely to see the turmoil as dramatic as its recent rise to $100,000 a ton soon — but if producers and consumers can’t agree on a more reliable measure of pricing, it won’t be the last disruption to hit the market. comes.
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David Fickling is a Bloomberg Opinion columnist on commodities, as well as industrial and consumer companies. He was a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.
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