Jun 12, 2023
Nickel surplus seen widening in 2023 as Indonesian output soars

JAKARTA -- The global nickel supply is heading for a bigger surplus this year as more Indonesian smelters feeding EV battery and stainless steel industries come onstream, threatening to keep prices below the record highs of 2022.

Prices rose to new heights last year after Russia -- another major nickel producer -- invaded Ukraine, and on the back of rising demand for so-called Class 1 nickel used in electric vehicle batteries. Class 1 nickel has a higher purity than its Class 2 counterpart, which is commonly used in stainless steel production.

However, nickel production also began outstripping demand again in 2022, as Chinese-backed smelters in Indonesia rapidly increased their output of nickel pig iron and ferronickel -- used as feedstocks in stainless steel production -- while a slowing global economy muted stainless steel demand, analysts said.

The market is "heading for a larger surplus in 2023" and "will not see a deficit before 2028," Ellie Wang, Shanghai-based analyst at consultancy CRU Group, told the Indonesia Miner conference last week.

Wang noted that global stainless steel production fell for the sixth consecutive quarter from January to March amid China's slow economic recovery. EV sales are also slowing so far this year after the Chinese government ended its EV subsidy policy on Dec. 31. China is the world's largest producer and consumer of stainless steel, EVs and batteries.

But with China's EV sales expected to recover in the second half of 2023, nickel demand will pick up and reach 4.3 million tonnes by 2027, up from just below 3 million tonnes last year, with the battery industry replacing stainless steel as the biggest driver of demand, she said.

CRU has forecast the benchmark three-month nickel contract on the London Metal Exchange to average around $23,700 per tonne this year from about $25,600 per tonne in 2022, and to steadily decline to below $20,000 per tonne in 2026, which "remain[s] above historical levels," Wang said.

Nickel smelters have proliferated in Indonesia since the government imposed a permanent ban on nickel ore exports in January 2020 in a drive to build the domestic processing industry and move up the value chain. Indonesia is tied with Australia as home to the world's largest reserves of nickel, each holding a fifth of global reserves.

Tens of billions of dollars of investments have since been made in Indonesia's nickel smelter sector, led by China but also a growing number of other countries. Most recently, the Indonesian government announced a $9 billion investment plan covering nickel mining to battery cell development by a consortium of companies -- including Swiss commodities trader Glencore, Belgian battery materials producer Umicore and Indonesian state miner Aneka Tambang.

The number of nickel smelters in Indonesia has jumped from just 15 in 2018 to 62 as of April, according to Meidy Katrin Lengkey, secretary general of the Indonesian Nickel Miners Association, or APNI. And many more are on the way, as about 30 smelters are under construction and 50 are in planning stages, Lengkey said.

Subsequently, Indonesia's nickel mine production hit an estimated 1.6 million tonnes last year, up 54% from 2021, according to the U.S. Geological Survey. That makes up nearly half of global nickel production that totaled an estimated 3.3 million tonnes.

Jim Lennon, senior commodity consultant at Macquarie Group, said Indonesia's planned total annual nickel production capacity currently exceeds 5 million tonnes. From 2022 to 2029, Indonesia's nickel production will account for more than 75% of the global supply, he said at the SMM 2023 Indonesia Nickel and Cobalt Industry Chain Conference in Jakarta in late May.

Considering the underutilization of nickel production capacity in Indonesia, the market may continue to be in surplus in the next five years, Lennon added.

But most Indonesian smelters in operation, under construction and in planning stages, still serve the stainless industry, and commonly use a type of ore called saprolite. Overexploitation has caused Indonesia's saprolite reserves to quickly deplete, according to Lengkey, warning that it could only be another six years before such deposits dry up, considering the current pace of production capacity growth. APNI is calling on the government to impose a moratorium on the construction of new smelters processing saprolite.

But Indonesia has another type of ore called limonite, which remains in abundance. Having lower nickel content, limonite ore had mostly been dumped by miners in the past. But its use has been growing with the China-led introduction of high-pressure acid leaching (HPAL) technology, which allows the processing of low-grade limonite into mixed hydroxide precipitate (MHP), a mixture of nickel and cobalt for battery production. Indonesia's growing MHP production is turning the country into the second largest producer of cobalt, though its 5% share of global cobalt production last year is still far below Congo's 73%, the Cobalt Institute said in May.

Three HPAL smelters are currently operational in Indonesia -- all owned by Chinese-Indonesian joint ventures including Halmahera Persada Lygend, Huayue Nickel Cobalt and QMB New Energy Materials. Lengkey said six other HPAL smelters are under construction, with another six in planning stages -- including a $4.5 billion joint project between Chinese battery materials producer Zhejiang Huayou Cobalt, Vale Indonesia and U.S. carmaker Ford Motor through joint venture Kolaka Nickel Indonesia.

Despite the growing use of lithium iron phosphate batteries containing no nickel, also led by China, nickel-based batteries are still expected to dominate the global battery market through 2030 as they offer greater energy density for long-range EVs, analysts have said.

A shortfall of Class 1 nickel products -- sourced mainly from Russia, New Caledonia and Canada -- has shifted many battery makers' focus to processing Indonesia's low-grade ore into materials suitable for batteries through HPAL.

But HPAL adoptions have prompted growing environmental concerns due to the larger carbon footprint, particularly in Indonesia, which still relies heavily on coal for electricity, and with no solution in sight for the problem of huge amounts of solid waste generated in the process.

In the meantime, some industry players are happy that nickel prices have gone down, including Chinese battery precursor maker CNGR Advanced Material. "We don't like it if the nickel price is too high. People will find substitutes. So we like prices to be stable," Dani Widjaja, vice president of CNGR, told the mining conference in Jakarta last week.

Correction: This article has been amended to correct the location of the SMM 2023 Indonesia Nickel and Cobalt Industry Chain Conference to Jakarta.