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Booms and busts follow a predictable cycle. High prices attract investment in new production, which then swamps the market. The consequent low prices force capacity to shut down. Cue, one hopes, a price recovery.
The lesson from the slump in battery metals is that things are rarely as straightforward as all that.
Take the nickel market. By rights, sizeable production cuts, of which BHP’s suspension of its Western Australia nickel plant is but the latest, should mean the end of its bust cycle is nearing. But the metal is unlikely to regain its shine anytime soon.
Nickel’s problem — unlike cobalt, which is a by product of mining other metals — is not that capacity is sticky. Producers have responded rationally to the price slump. BHP, whose plant lost $300mn of ebitda in the year to June, is only the latest to mothball facilities: announced production cuts total around 400,000 tonnes, thinks broker Liberum. That’s well over 10 per cent of the overall market last year, and vastly reduces oversupply which has fallen into the low single-digit percentage points.
Even so, prices will struggle to rise. Nickel has a fast growing and relatively price insensitive producer in Indonesia. Chinese investment into the country’s mining sector will drive its production to 2.2mn tonnes this year according to Macquarie — or 65 per cent of global supply — up from 600,000 tonnes in 2020. At these prices, Indonesian mines may not, in themselves, be vastly profitable. But that has not stopped production growth.
There may also be pockets of hidden supply, at least for those tracking prices at the London Metal Exchange. One of these is lower grade nickel pig iron, where a lot of the surplus has been concentrated. It now trades at a vast discount to the “class one” metal quoted on the LME, encouraging producers to invest in upgrading. The exchange has already been fast tracking new nickel brands, sparking concerns that the glut may spread to the value-added product.
The hope, for miners, must be that demand for nickel picks up. Two-thirds of the metal is used to make stainless steel, which is not performing too poorly. But demand for nickel in batteries barely grew last year as inventories were run down. With EV sales stuck in the slow lane, prospects for the metal look dim.