Five things to know about nickel’s 90% price surge

nickel traded on the London Metal Exchange Monday, with a 90% jump that went as high as $55,000 a metric ton before closing at $48,078.

Things went even wilder on Tuesday, rising as high as $100,000 — nearly quadruple the price last Friday.

That sounds dramatic, but it’s unlikely that you’d notice the ripple effects of this in the wider economy over the year ahead, and prices driven by a short squeeze of this sort tend to calm down rapidly. The rising cost of nickel won’t hit your hip pocket the way that the price of oil or wheat may well do. Here’s why:

You don’t use a lot of nickel.

The U.S. five-cent coin, despite its nickname, is mainly made of copper — nickel only comprises about a quarter of the alloy. About three-quarters of the world’s nickel is mixed with chromium to make stainless steel, which in turn is mainly used in appliances, machinery and cutlery.

Unlike crude oil, natural gas, wheat, rice and soybeans, such metals aren’t consumed day in, day out — they’re only used when people make one-time purchases of discretionary goods.

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When the price of food or energy rises, it has a lasting effect on the cost of living — and because we buy those products every day, we notice the difference. Politicians are seen as out of touch if they don’t know the price of a bottle of milk. No one expects you to know the cost of a cutlery set from one month to the next, and only at the very lowest end would the price of nickel make a significant difference to that number.

There are two types of nickel out there.

Nickel traded on the London Metal Exchange is so-called Class 1 nickel, which must be at least 99.8% pure. But about half of the world’s nickel is less refined Class 2 metal, most of it in the form of products such as ferronickel and nickel pig iron which can be cheaply converted into stainless steel at Chinese smelters.

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Those two products in turn tend to be produced by quite different ores. Nickel sulfide deposits are ideal for processing into high-purity products like Class 1 nickel, but they’re relatively scarce and confined to a handful of locations in temperate countries.

The boom market in recent years has been in Class 2 nickel, which is mostly produced from nickel laterite, a lower-grade ore that’s easily strip-mined from weathered ground in Southeast Asia and other parts of the tropics.

Russia accounts for only about 9% of nickel supply, but it has closer to a third of the world’s nickel sulfide ore. That gives the status of its exports an outsize impact on the price of the Class 1 metal traded on the LME.

This grade is also currently most suitable for producing nickel sulfate, a chemical that will have growing importance in the coming years because of its use in electric vehicle batteries.

Nickel is the most volatile metal.

Many metals are produced by relatively standardized methods. Almost all the world’s aluminum has been made via the Hall-Heroult smelting process since the 19th century. That makes prices relatively predictable, because there’s only one technology to think about.

Nickel is different, with an array of different methods and end-use sectors that interact in often unpredictable ways. Lurching swings in price are fundamental to the nickel market, with 90-day volatility over the past 10 years markedly higher than for other LME-traded metals:

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The potential for processing lower-grade Class 2 nickel into higher-grade Class 1 product, however, should ensure that prices move back into line over time. Once LME prices are north of $25,000 a metric ton, there’s good money in upgrading Class 2 metal to the higher-quality product.

We saw something similar during nickel’s last dramatic spike, when it nearly quintupled in price in the two years to April 2007 before losing three-quarters of its value in the two years afterwards, as the rise of lower-grade ferronickel and nickel pig iron technologies stole away market share.

Inventories are low, but not desperately so.
The bulk of the world’s metal trading takes place away from exchanges like the LME in direct contract relationships between a relatively small number of producers and consumers.

The metal that finds its way to the exchanges is usually surplus product, which the same producers and consumers buy and sell to hedge the prices they’re receiving in the physical market, and come up with a reference price against which they can benchmark those trades.

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Traders pay close attention to the inventories of metal held in exchange warehouses because they’re seen as the evidence of how tight the wider market really is. Those stocks — especially of the on-warrant metal that’s available for traders to pick up — have been falling to historically low levels.

Still, with 36,654 of deliverable metal in the LME’s warehouses, we’re far above where we were in 2006, when the 870 tons of global inventory could have been stacked on one side of a tennis court without rising above the level of the net.

There’s a nickel supply boom underway.

Another of the processing revolutions that periodically rock the nickel market is underway right now, as a swath of Chinese plants start up in eastern Indonesia to turn low-grade laterite ores into a product with just the right grades of nickel and cobalt for electric vehicle batteries.

That technology hasn’t worked well in the past, but the scale of investment going on suggests that companies like Zhejiang Huayou Cobalt Co. think they’ve cracked the code for turning a profit from this business.

Unlike scarce nickel sulfide deposits, laterites are abundant across the world — so if that bet is right, we may have unlocked a significant new source of supply as we did with the nickel pig iron revolution a decade ago.

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Commodity analysts see nickel trading below $20,000 a ton after the first quarter of this year and not creeping back above those levels until at least 2025. Those forecasts often turn out to be wrong, but it’s unlikely that prices will remain close to current levels for more than a few weeks. Nickel is not a scarce commodity, and we’re making more of it than we ever did before.