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Nickel market in 2022: So far, without sanctions and OPEC

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Prices for nickel, like for other metals, were under the ‘bearish trend’ pressure in the second half of this year due to the consequences of a new COVID-19 outbreak in China, tightening the monetary policy by central banks, and recession expectations. These factors have led to weakness in the steel industry, which has so far dominated nickel demand. Meanwhile, the important role of nickel in the electric vehicle (EV) sector makes it possible to look positively at the long-term outlook for the metal. Most market stakeholders predict a market surplus in 2022 and 2023, although it will be predominantly the surplus of low-grade metal, while the market for high-grade nickel used in batteries will be balanced or show a moderate deficit.

The long-term forecast for the nickel market development may be impacted by two possible, although not obvious, circumstances like the restrictions on the export of the Russia’s nickel and the setting up of a ‘nickel OPEC’; this option is under consideration in Indonesia, the largest nickel producer.

BRIEF FACTS ABOUT NICKEL

Stainless steel, which does not require high-grade nickel, accounts for about 70% of the global demand for this metal. About 13% of the world’s nickel is consumed in the battery production sector where nickel is an important element for lithium-ion batteries.

Nickel ore is mined from two types of deposits - lateritic and sulfide ones. According to the US Geological Survey, the discovered surface ore resources containing an average of 0.5% nickel, are at least 300 mn tonnes. Of these resources, 60% are lateritic deposits, 40% are sulfide ore deposits. Sulfide deposits are more difficult to mine due to the depth and complex ore mineral composition; lateritic deposits are more accessible and have stable grades, but the extraction of such ore involves acid leaching at high temperatures.

The production of battery cathodes generally requires a Class 1 metal containing at least 99.8% nickel. This metal is typically produced from sulfide ore, as opposed to Class 2 nickel used in steelmaking and mainly obtained from lateritic ores.

Indonesia, the Philippines, Russia, New Caledonia, Australia and Canada are the major nickel producers.

Indonesia is the world’s largest nickel producer accounting for 38% of the global supply, according to the CRU consulting firm. The country, which accounts for a quarter of the world’s reserves of this metal, is the main source of growth in its output in the coming years. The Indonesia’s production has risen from 345,000 tonnes in 2017 to 1 mn tonnes in 2021.

Indonesia is rich primarily in lateritic ores, and the country’s capacity for the production of battery nickel is still rather insignificant. Most Indonesian nickel products are the lower purity materials used in the stainless steel production, and the country needs more processing capacities to turn it into a material suitable for batteries.

The first processing plant for the production of nickel suitable for batteries was opened in May 2021. Now, according to the Center for Strategic and International Studies (CSIS), seven more such projects are under development. These facilities will use the High Pressure Acid Leaching (HPAL) method, which purifies the metal to Class 1.

To stimulate the development of processing companies in the country, Indonesia banned the export of nickel ore in 2020 and now plans to impose a tax on the export of intermediate products of nickel metallurgy in an effort to support the development of a complete supply chain for electric vehicle component production. This is facilitated by the proximity to China, which leads in the EV production. As the country with the largest nickel reserves, Indonesia is increasingly focused on attracting the investments in its production capacities throughout the electric vehicle supply chain, CSIS notes.

The Philippines produced 370 kt of nickel in 2021. According to S&P Global Market Intelligence, nickel production in the Philippines could reach about 500 thousand tonnes by 2025.

Russia ranking third in terms of metal production accounts for 20% of high-grade nickel used in batteries. Metal production in the country is declining. In 2018, the production of nickel in the country amounted to 272 thousand tonnes, but in 2021 it fell to 250 thousand tonnes. The main reason is the temporary suspension of ore mining at the Oktyabrsky and Taimyrsky mines in February 2021 due to groundwater flooding, as well as the accident at the Norilsk concentrating plant at the same time.

Norilsk Nickel still plans to invest $35 bn in the modernization of processing facilities and the development of mining ones, as well as in the environment protection and energy infrastructure in order to increase the production of metals, in particular nickel and copper, by 20-30% by 2030. However, these plans - both in terms of timing and operations - can be adjusted due to the restrictions imposed by the Western countries on the supply of components and equipment to Russia.

MARKET BALANCE AND FORECASTS

In January-August this year, the demand for nickel exceeded the production, according to the World Bureau of Metal Statistics (WBMS), and the market saw a deficit of 75.5 thousand tonnes. Refined nickel production for 8 months amounted to 1.85 mn tonnes, with demand of 1.97 mn tonnes. The metal inventories on the London Metal Exchange (LME) by the end of August were lower by 45.3 thousand tonnes compared to the levels at the end of 2021. However, the deficit declined compared to a year ago, as the 8-month production growth outpaces the demand growth amounting to 256 thousand tonnes and 76.8 thousand tonnes, respectively.

As a result, Norilsk Nickel expects that 2022 will end with a surplus of 75 thousand tonnes of nickel (after a deficit of 170 thousand tonnes a year earlier). In 2023, the surplus will increase to 150 thousand tonnes of nickel. However, the surplus will be mainly due to low-grade nickel, which is supported by the increase in the low-grade ferronickel (or nickel pig iron, NPI) production in Indonesia along with the growing production of nickel salts.

Demand for primary nickel will increase by 8% and 12% in 2022 and 2023, respectively, primarily due to the expansion of the stainless steel production in China and Indonesia amid the recovery from the coronavirus pandemic, as well as a strong growth in the battery sector, Nornickel believes.

Metal supplies will increase by 18% and 14% in 2022 and 2023, respectively, due to the commissioning of the NPI facilities in Indonesia and an increase in the production of nickel chemicals through the conversion of ferronickel, and directly from lateritic ores using a HPAL technology for the electric vehicle sector.

However, according to Norilsk Nickel, the surplus may be even more significant. The risks are that energy problems in Europe and a slowdown in China could jeopardize the demand recovery in the key nickel-consuming industries.

The International Nickel Study Group (INSG) predicts a 16% increase in nickel production in 2022, to 3.036 mn tonnes, and to 3.387 mn tonnes in 2023. The output growth will be provided by Indonesia and China. These expectations do not take into account possible production deficiencies and supply interruptions. Nickel consumption will grow by 4% in 2022, to 2.892 mn tonnes, and it will reach 3.216 mn tonnes by 2023. As a result, a nickel surplus, according to the INSG, will amount to 144 thousand tonnes this year and 171 thousand tonnes next year.

StoneX estimates that the nickel market should show a modest surplus in 2022 due to a sharp decline in the largest consumption segment (stainless steel), despite rising demand from the fast-growing electric vehicle market.

Adrian Gardner of Wood Mackenzie believes that the market will become surplus either at the end of 2022 or in Q1 2023. At the same time, he does not expect a structural surplus, that is, an excess of demand over supply for several years. The surplus of Class 2 metal will be eliminated as soon as the economies of China and other leading developed countries overcome the current problems, Gardner says.

S&P Global raised its 2022 nickel market surplus estimate to 46 kt (from 34 kt) due to the negative impact of the conflict between Russia and Ukraine on demand. This estimate does not assume the impact of a possible reduction in access to the Russia’s nickel. The Russian metal will be redirected to China from Europe and the United States, where, in turn, the deliveries from Australia will be made, according to S&P Global.

Japanese Sumitomo Metal, on the contrary, believes that the global nickel market in 2023 will be in short supply, although the shortage of the metal will decrease (to 63 thousand tonnes from 108 thousand tonnes in 2022). Demand is set to rise by 7.1% next year to 3.14 mn tonnes amid the steady demand for batteries, semiconductor equipment and oil wells. At the same time, demand for nickel for batteries will grow significantly, from 410 thousand tonnes to 500 thousand tonnes. Nickel supplies in 2023 will increase by 9% to 3.08 mn tonnes, mainly due to increased production of low-grade nickel pig iron in Indonesia, Sumitomo said.

WEAKNESS IN STEEL, POTENTIAL IN BATTERIES

The International Nickel Study Group (INSG) states that in 2022, there will be a decline in nickel consumption in the stainless steel sector and an increase in the use of the metal in the electric vehicle battery production.

The stainless steel production in the first half of the year was significantly limited by the coronavirus outbreak in China and a decline in final demand in other regions, according to Nornickel. As a result, the consumption of primary nickel in the stainless steel sector decreased by 2% in January to June, including by 5% in China.

Since April, the weaker demand from the steel sector has weighed heavily on the primary nickel consumption, according to Wood Mackenzie. Adrian Gardner of Wood Mackenzie believes that this weakness is likely to continue into Q4 2022 and also impacts the growth profiles in Q1 2023. Demand in the stainless steel industry will be fairly subdued, according to Senior metals analyst Natalie Scott-Grey of StoneX.

As Wood Mackenzie points out, the supply of Class 2 finished nickel, in particular, nickel pig iron (NPI), is growing, perhaps, too fast to be completely absorbed by the steel industry. By the end of this year or Q1 2023, Wood Mackenzie expects some accumulation of the NPI as well as intermediate products such as nickel matte. Scott-Grey of StoneX estimates that production will set a record in 2022 thanks to an increase in the NPI capacity in Indonesia and the development of alternative methods for producing Class 1 nickel through NPI leaching.

Nickel is also a key element used in electric vehicle batteries and many experts estimate that demand in this sector will increase significantly in the coming decades. Gardner says that the primary nickel demand from the battery sector, especially in China, which controls 80% to 85% of demand for nickel in battery precursors, has been much stronger than expected and seems to continue in Q4 2022.

According to Norilsk Nickel, demand for primary nickel increased by 3% YoY in the first half of the year, primarily due to high consumption of the battery sector amid strong sales of electric vehicles, which in January through May grew by 78% compared to the same period in 2021. In other non-stainless steel segments like oil and gas and aerospace, the demand grew moderately.

LONG-TERM OUTLOOK

Nickel will be a long-term beneficiary of the electric vehicle sector whose rapid expansion is driven by the global decarbonization trends and the transition to low-carbon energy actively supported by state subsidies around the world, Nornickel believes.

While Norilsk Nickel has a cautious outlook in the medium-term horizon, it is more positive in the long-term. In addition to a significant increase in the growth rate of the electric vehicle market, this forecast is based on the assumption that the increase in the Indonesia’s capacity and other projects around the world may be below expectations again.

Norilsk Nickel predicts that by 2030, nickel consumption in the battery industry will exceed 1 mn tonnes, which will account for 30% of the total production. “Net-zero carbon dioxide emissions targets are becoming increasingly ambitious, while measures to support transport electrification and battery cost optimization could accelerate the global energy transition. Moreover, the battery production industry will need low-carbon nickel items, which, we believe, will be in short supply given the expected aggressive vehicle electrification rates,” the company notes.

A similar forecast for expanding demand from the battery industry is given by the Center for Strategic and International Studies (CSIS), which estimates that about a third of all nickel production will be consumed in this sector by 2030. CRU forecasts that demand from the battery industry will reach 32% of the total nickel demand by 2040.

S&P Global’s long-term forecast assumes a nickel surplus until 2025. In 2023, the metal surplus will be 57 thousand tonnes (previously, they forecasted 48 thousand tonnes), 69 thousand tonnes in 2024 and 8 thousand tonnes in 2025. In 2026, the market will be in deficit for the first time since 2021 (in the amount of 77 thousand tonnes), according to S&P Global.

NICKEL ‘OPEC’

The largest player in the nickel market, Indonesia, seeks to control prices for the metal in addition to rapid mining and investing in various stages of processing and refining. Indonesian Investment Minister Bahlil Lahadalia told the Financial Times in October that Indonesia was exploring the possibility of creating an OPEC-like structure that would bring together the producers of nickel and other metals used for batteries.

He said that the country studies the oil cartel’s mechanisms that could be used in the market for metals critical to the energy transition. “I see the feasibility of creating OPEC to manage oil trade, which provides predictability for potential investors and consumers,” the minister said. “Indonesia is exploring the possibility of creating a similar management structure for our minerals, including nickel, cobalt and manganese.”

Asked if Indonesia had discussed the idea with other major nickel producers, Lahadalia said his ministry “is still working on the structure of the future organization” that the country could propose “to other nickel-producing countries”.

In addition to the geographically diverse composition of possible participants in the cartel, which should have included Russia, Canada and Australia, the prevailing non-state form of ownership is also an obstacle. Unlike the OPEC where national state-owned companies dominate, foreign producers play the main role in nickel production in Indonesia, such as China’s Tsingshan, the world’s largest stainless steel producer, and Brazil’s Vale, the leader in nickel production.

This year, the country will begin production of two models of electric vehicles - the South Korea’s Hyundai Motor and the China’s Wuling Motors.

PRICE FORECASTS

After nickel prices hit an all-time high of $100,000 in early March, rising more than 250% in just a couple of days (due to the massive nickel short squeeze built up by China’s Tsingshan), the metal dropped to around $21 thousand in Q3. Nickel was at its lowest level, $19.5 thousand per tonne, in mid-July.

FocusEconomics’ analysts say in a September report that a tighter monetary policy around the world, the consequences of the conflict in Ukraine, as well as an unstable situation in the real estate sector in China and the new outbreak of Covid-19 in Shenzhen have hurt the activity. However, declining nickel inventories in the LME warehouses supported the prices. According to Norilsk Nickel, while the exchange stocks’ inventories were equivalent to 40 days of consumption in December 2021, they decreased by 40 thousand tonnes by June 2022, which is comparable to 8 days of consumption.

StoneX sees the prices averaging $25,206 a tonne this year before dropping to an average of $19,000 to $22,000 in 2023. Scott-Grey said that given the low liquidity, the prices are more dependent on macroeconomic news, which is likely not to change much before the end of the year. Scott-Grey said that any demand optimism would be fueled by a recovery in China.

Gardner of Wood Mackenzie expects the price range to remain narrow between $21,000 and $22,000 through the end of the year.

Analysts say that possible sanctions against the metal of the Russian origin are the key risk factor for nickel.

POSSIBLE DISRUPTION OF SUPPLIES FROM RUSSIA

With the onset of the conflict between Russia and Ukraine, the market access for the Russian export commodities, including nickel, became more complicated. The main volumes of non-ferrous metals are sold under long-term contracts, which, as a rule, are renegotiated for the next year in October-November. The company noted in a performance press release for January-June in 2022 that during the year, the Norilsk Nickel’s clients generally fulfilled their obligations under contracts taking into account the company’s significant share in the metals markets, although the supply chain disruptions led to the accumulation of unsold stocks. The physical volume of sales of refined nickel produced by Norilsk Nickel in H1 2022 remained at the level of the same period last year (83 thousand tonnes), although it should have grown amid the production recovery.

Toward the end of the year, the situation became more tense despite the fact that the USA and EU didn’t impose their sanctions on Norilsk Nickel and its products.

“Taking advantage of the situation, some of our partners are trying to revise the terms of existing contracts in their favour, trying to reduce the volume of purchases for the future period, as well as imposing a kind of ‘self-sanctions’ and shying away from goods of the Russian origin. It turns out that the alternative is either to make quite serious discounts or re-channel our deliveries to other markets,” said Vladimir Potanin, CEO of Norilsk Nickel, in mid-September. The company is working on re-channeling its exports to the East, organizing an alternative supply chain through the port of Tangier (Morocco), although the company prefers to maintain its position in the EU and USA markets, since Russia-friendly countries purchase products at a discount, taking advantage of the situation.

Igor Leikin for Rough&Polished