Nickel sulfate vs metal: is the market moving towards new pricing mechanisms?

Three months after a historic short squeeze on the London Metal Exchange that pushed nickel prices above $100,000/mt, the LME is back in the spotlight. This time, he faces two lawsuits, a complaint and a membership cancellation because of the situation.

Many market participants have openly expressed concerns and damaged confidence in the exchange, with hedge funds and trading houses paving the way for nickel positions to be reduced or outright withdrawn.

Have nickel sulphate producers and consumers, who have traditionally relied on LME nickel contracts to hedge price risks in the physical market, been inclined to deviate from tradition and seek alternatives?

LME nickel prices disconnected from sulphate fundamentals

Nickel sulphate is one of the main raw materials used in the production of nickel-cobalt-manganese (NCM) batteries. The main raw material for nickel sulphate is mixed hydroxide precipitate (MHP), nickel briquettes/powder or nickel matte.

However, nickel briquette, one of the few deliverables on the LME, has been losing ground among Chinese refiners and precursor manufacturers due to high metal prices. Some sources predict that it could be phased out entirely in favor of cheaper intermediates like MHP and matte. But as MHP and matte are not deliverable on both the LME and the Shanghai Futures Exchange, nickel prices to date have yet to reflect new volumes from Indonesian mines this year, sources said. of the market.

“The market is aware that trading prices currently do not reflect market conditions for the battery sector,” said a Chinese analyst. “The price of nickel is a huge headache for everyone and certainly deserves further discussion.”

Liquidity on the LME took a huge hit after nickel trading was suspended for eight days from March 8. While nickel prices have since fallen below $30,000/mt, average daily trading volumes on the LME have continued to fall, falling just above 40,000 mt. in May, down 35% over the year.

“The market is still feeling the LME disruptions and today the contract is still not working like before this event,” said a European producer of nickel sulphate.

A European automaker said it was also wary of the LME nickel price since the short squeeze.

“We will definitely consider linking the contracts to a nickel price index,” the automaker said. “Ideally, automotive OEMs want long-term fixed-price deals, but we know the risk associated with that. Sellers find a way to tear up a contract if spot prices rise too high, we have seen this on other commodities.

Although Chinese market participants have traditionally referred to SHFE in the domestic market, LME-SHFE arbitration has remained a significant challenge as China is a net importer of nickel.

“We received requests from our Chinese customers to switch to SHFE pricing shortly after the LME suspended trading,” said a European trader. “But we rejected the idea because we have no position in Shanghai, which prevents us from hedging our own risks.”

Some Chinese sources have also pointed out that, like the LME, the SHFE only allows trading in nickel metal, which does not address the fundamental problem of a growing decoupling between trading prices and market fundamentals.
Unlike other battery materials such as cobalt and lithium, nickel is unique in that it is not primarily driven by global battery demand. Around 70% of the world’s nickel production is consumed by the stainless steel sector, while batteries only consume a modest 5%.

S&P Global Market Intelligence expects global primary nickel consumption to rebound year-over-year due to stainless steel capacity expansions in China and Indonesia.

However, future nickel demand growth will be largely driven by the battery sector, which according to Market Intelligence will drive the market into a supply gap in 2026. Many producers and end users in the market have also predicted that the Battery industry demand for nickel will accelerate dramatically, with some pegging it at nearly 35% of total demand by 2030.

New contracts, pricing mechanisms: the way forward?

Despite the trading hiatus, market sources said they have yet to see a change in the traditional LME-linked debt system for MHP, which remains the most popular feedstock for sulfate refiners. nickel. Instead, payable values ​​have fallen from 90% to around 68% to 70% over the past three months as a compromise with rising metal prices.

Currently, the price to be paid for MHP is negotiated between buyer and seller, without an index or benchmark price commonly used by market participants. However, non-LME pricing methods have been heard for other intermediaries such as nickel matte, which is expected to grow its market share as Chinese-owned mines in Indonesia ramp up volumes in the coming months. .

According to traders in China, Matte would have been priced based on the domestic nickel sulphate price to be paid.

“This pricing method poses less risk to the battery industry than using stock-linked prices that are determined by stainless steel, especially when market demand is weak,” a Chinese trader commented. .

Other nickel intermediates such as ferronickel and nickel pig iron would also have adopted fixed prices, completely delinking from the LME.

Asked about the possibility of a nickel sulphate contract, market participants were supportive of the idea, with a Chinese precursor maker saying “this is definitely the way to go for the battery industry”.

“Before, it was fine as long as the LME was working. It was simple and the discussion was only about the level of nickel sulphate. It would be nice to have a reliable benchmark for nickel sulphate,” said a European producer.

“These contracts would be welcome for the battery industry,” said a Chinese refining source. “Personally, I think a nickel sulphate contract would be a great idea as it would more accurately reflect real market conditions.”

A South Korean battery manufacturer said that while it was difficult to change the nickel sulphate index, many consumers were keen to change and that a nickel sulphate contract would be welcome.

Product standardization was a key issue highlighted by market participants, but sources largely agreed that discussing and trying new pricing methods was a step in the right direction.

“There will naturally be a progression away from nickel metal as battery markets develop,” said a European producer. “So a contract would be well chosen if it was launched.”
Source: Platts