This is a continuation and extension of a recently published piece “Disruption in global nickel” embedded below. This piece contains a number of speculative inferences and readers should apply their own critical judgement and common sense to digest this opinion.
The global nickel industry today is at a peculiar juncture. In recent years, we have been bombarded with the notion that ‘green’ nickel will somehow attract a premium price despite offering no tangible utility to an end consumer; that nickel demand will rise strongly driven by the greater adoption of electric vehicles; that ‘NMC’ battery chemistries will persistence and dominate within the electric vehicle sector as well as the paucity of nickel sulphide resources to support the anticipated rise in demand for Class 1 nickel.
Unfortunately for nickel investors, all these expectations withered under the harsh glare of the market environment. ‘Green’ nickel has proven to be a pipedream, NMC battery technologies have been supplanted by lower cost LFP battery chemistries and Class 1 nickel is now being produced from nickel laterite deposits. Whilst the market at large was distracted by the electric vehicle growth thematic, the largest consumer of nickel ie. stainless steel production was largely ignored.
Today we see an interesting and atypical industry structure in nickel, where downstream commodity consumers hold a large degree of influence over upstream supply. Accordingly, upstream market power now lies with the end of the supply chain. The benefits of vertical integration can now aggregate to the margins of downstream commodity consumer versus the previous dynamic of a large portion of upstream producer cost curve being able to harvest adequate returns. The key to this dynamic are 3 factors: holding sufficient market power in both up and downstream segments, innovative technology and stable end consumer demand for downstream finished goods.
The company at the centre of the web is the world’s largest nickel producer and consumer, the Tsingshan group of China and it’s ASX listed, upstream partner in Nickel Industries (NIC.AX).
NIC have developed a close working relationship with Tsingshan, over the recent years. NIC holds interests in a number of Indonesian nickel laterite processing operations and deposits; most have been acquired as a result of strategic alignment with Tsingshan.
This has a range of benefits for both parties. NIC benefits from Tsingshan’s leading industry-leading intellectual property, development know how and political muscle. Tsingshan benefits by delivering upstream projects at a (presumably) attractive margin, recycles capital by selling project interests to NIC and, perhaps most importantly, keeps the world awash in nickel supply.
Tsingshan appears to have perfected the ‘industrialisation’ of Class 1 nickel production, using breakthrough technologies to upgrade products from bulk laterite deposits. Via it’s majority shareholding in NIC, it enjoys access to western capital markets (without deep probity into its own financial affairs) and benefits from any valuation uplift priced by the free markets. NIC benefits from a low-cost stable cost base, increasing the probability of consistent EBITDA margins and look through cash conversion. Quite typical and optimal for a mid-stream commodity processor.
This raises a number of questions for me, most prominently: Is there an incentive for Tsingshan to constrain nickel production growth?
The LME nickel scandal in 2022, where the nickel spot price spiked over 270% to a high of over US$100,000/t ($45/lb!); was triggered by rumours of large short-positions being held by Tsingshan as well as the implications of Russian sanctions imposed by western nations. In an unprecendented action for an exchange, the LME unilaterally cancelled many days of trade conducted; demonstrating the influence that Chinese suppliers exert over the upstream market.
Despite the terrible outlook for western nickel producers, there may be hope.
The Indonesian government have recently disclosed that attractive tax incentives being offered for nickel projects are being reduced. In addition, they require that downstream products for export to be of at least 60% nickel content making nickel matte the ideal end product, again where Tsingshan has an advantage.
This is counterbalanced by the enormous inbound investment from East Asia into new mid and downstream production facilities within Indonesia; which demonstrates to me that Indonesian nickel production capacity will remain firm in the coming decades ahead. Interestingly, NIC guide to their future production being heavily skewed towards Class 1 nickel products going forward, adding credence to this theory.
NIC have recently announced a new dividend and capital management policy potentially indicating that the company may be in a position to ‘harvest’ their returns in the coming years rather than the breakneck growth it has undertaken in recent years.
As a disinterested party, this will be an intriuging story to follow in the years ahead.
Disclaimer: The information contained in the material on this website article is for wholesale investors only and for educational purposes only. It reflects only the opinion of its author in a strictly personal capacity
Thanks EA. Do you have a view on why Tsingshan was short in 2022? Is it simply a way of hedging single commodity exposure or do you think it indicates what Tsingshan sees for the future of the market?