Miss Out On The Rise In Cobalt & Lithium? Here’s Another Metal To Keep An Eye On

July 28, 2017

Miss Out On The Rise In Cobalt & Lithium? Here’s Another Metal To Keep An Eye On

  • Nickel is used in Tesla’s batteries, but its price hasn’t surged like cobalt or lithium has.
  • Supply is expected to be stable while more electric vehicle production could increase demand by 20% per year.
  • A long period of low investments, higher demand alongside stable supply could lead to a spike in nickel prices.

Introduction

When most people think about batteries and their composition, they mostly think about lithium as batteries are called “lithium-ion batteries.” However, lithium is only one of the metals that goes into a battery. The approximate amount of lithium used in a Tesla Model S battery pack is 63kg of a 453 kg battery. So there is another 390kg to address. A look at what other metals are used to make batteries for electric vehicles will give us interesting investing ideas.


Figure 1: Metals used in batteries besides lithium for Tesla’s Model S, Apple’s iPhone, the Nissan Leaf, and the Tesla Powerwall. Source: Electrek.

As you can see above, and even Elon Musk often says so, Tesla’s batteries shouldn’t be called lithium ion batteries, but nickel graphite batteries.

Now, cobalt and lithium are the metals that have already significantly spiked in the last year on speculation of much higher demand and questionable supply. Another metal that is needed in most electric battery combinations is nickel, but its price is still very cheap compared to its past price, and it hasn’t seen a surge similar to cobalt and lithium.


Figure 2: 5 year nickel prices. Source: InfoMine.

The relatively low price of nickel and the knowledge that it is used in battery production make a nickel investment play very attractive.

The reason for the cheapness of nickel is the fact that electric vehicle speculators see the existing supply of nickel as sufficient to cover sector needs and unlike cobalt and lithium, batteries for electric vehicles won’t be the main use of nickel.


Figure 3: Metal significance and supply risk for electric vehicle sector. Source: Electrek.

Nevertheless, investors should always look beyond speculation and toward industry fundamentals which is what we are going to do in today’s article. Perhaps the market just hasn’t recognized the value in nickel and it could be the next metal that surges in price like cobalt and lithium have already done.


Figure 4: Cobalt prices have almost tripled in the last two years. Source: InfoMine.

Nickel Industry Fundamentals

The bearish outlook for nickel prices shown in figure 2, with nickel prices at multiyear lows, is due to expected higher supplies coming from Indonesia as the country lifted its export ban at the beginning of this year, and from the Philippines as a result of greater political stability in that country. Expected slower demand growth from China certainly hasn’t helped as nickel is often used in the production of stainless steel which consumes almost two thirds of global nickel production. Additionally, warehouse levels at the London Metal Exchange are at extremely high levels.


Figure 5: Nickel inventory at the LME. Source: Kitco.

Supply & Demand

Global supply of nickel is around 2 million tons and isn’t expected to grow significantly as low nickel prices haven’t really stimulated investments.


Figure 6: Expected supply growth for nickel. Source: RNC.

Additionally, RNC points out that there aren’t significant projects that can cover for the higher demand growth expected for nickel, especially with the ramp up of electric vehicle production.


Figure 7: There aren’t any significant nickel projects coming online to cover for higher demand. Source: RNC.

As I’ve already mentioned, two thirds of the demand for nickel comes from stainless steel with the largest customer being China. As the rest of Asia develops, we can expect demand for nickel to stay strong.

Demand for nickel has been growing at a constant rate in the past 5 years driven mostly by China.


Figure 8: Nickel demand. Source: Glencore.

The second source of demand for nickel could be coming from electric vehicles. Today’s EV market is just 1% of total vehicle sales but if that increases to 10%, it’s expected that the demand for nickel increases an additional 400,000 tons in a 2 million ton market.

The first sign of higher demand for nickel may come from the ramp up of Tesla’s (Nasdaq: TSLA) Model 3 production as TSLA expects to produce 500,000 cars per year. So if you’re long TSLA, you should also be long nickel as it’s a huge component of TSLA’s battery pack.

As the supply growth isn’t enough to cover for demand, there will be supply deficits which usually make the price of a metal increase. However, in the case of nickel, the high warehouse levels can keep prices subdued for a longer period as a 100,000 ton deficit per year would take 5 years to clear inventories.


Figure 9: It will take some time for nickel to explode. Source: Glencore.

As the supply gap isn’t imminent, it could take some time for nickel prices to spike. Therefore, if you are interested in an investment, the best thing to do is to look at the low cost producers that are also profitable at current prices.

The current average cash cost for Nickel miners is $7,523 per ton while costs for marginal producers go much higher than that, with some around $20,000 per ton.


Figure 10: Nickel cash cost curve. Source: Norilsk.

This means that it’s possible to find profitable nickel miners that allow for a decent return until nickel prices spike up as has been the case for lithium and cobalt. Nevertheless, only a fraction of global miners have nickel as their top metal as nickel is mostly a byproduct from copper mining.


Figure 11: Nickel producers are mostly diversified miners with only a few being price sensitive. Source: Norilsk.

Conclusion

There is no immediate catalyst for nickel prices, but the fact is that when there is an immediate catalyst, like was the case for cobalt and lithium, it will already be too late to invest to be exposed to the whole upward cycle. Nevertheless from a fundamental perspective, it will take a while for global nickel warehouses to empty and this will keep downward pressure on price.

On the downside, the nickel cost curve shows that there isn’t much risk as it is highly unlikely for prices to be below the cash cost of almost 40% of global nickel producers.

I’ll keep following the nickel industry, and the connection between it and the growing electric vehicles sector, in order to catch the sector at an inflection point. So keep reading Investiv Daily to stay informed on the right time to invest in nickel if you aren’t convinced already.

By Sven Carlin Commodities Investiv Daily Nickel Share: