By Tom Price, Head of Commodities Strategy at Liberum
Rightly or wrongly, one motivation to buy an electric vehicle (EV) – rather than a conventional internal combustion engine (ICE) vehicle – is the promise that your decision might help pare transport-related emissions. This belief has been central to EV advertising pitches since these vehicles emerged in 2015 as commercial alternatives to ICEs.
With global EV sales set to grow by over 40% year-on-year in 2024 to almost 20 million units – representing 22% of all vehicle sales – the EV paradigm now seems secure.
But there’s a glitch. Two-thirds of the batteries used in EVs feature nickel-bearing technology; almost 60% of the world’s annually-mined nickel is extracted from the rainforests of Indonesia; and commodity markets are just starting to price ‘green premia’, valuing the ESG credentials of traded metals (copper, aluminium, steel).
So, what sort of premium could be achieved for rainforest-sourced nickel, requiring energy-intensive processes to isolate it from its lateritic matrix? Here, we look at the world’s growing dependency on Indonesia’s nickel exports, and explain how batteries now rival stainless steel as nickel’s first-use driver.
Indonesia – centre of global nickel supply
Over the past decade, Indonesia has emerged as the world’s largest source of nickel, the outcome of a national government policy enforced in 2014 – effectively directing foreign investors of its mining industry to build downstream processing capacity in-country.
While many players have been involved in the development of this mining hub (nickel, tin, copper, gold, coal), China has been the single-largest national investor in Indonesia’s nickel industry, via its ‘Belt-and-Road’ policy – almost US$20bn spent to date, with another $20bn pledged for broad-based infrastructure purposes, and to ‘strengthen ties’.
As a result, Indonesia’s nickel industry has evolved from being a modest contributor to global supply (15%, pre-2009) to delivering an increasingly complex collection of refined products (nickel-bearing alloys, semis, powder, mixed-hydroxide, sinter, etc.) and stainless steel (>3mtpa; 300-series).
Indonesia also has a pipeline of over 500 ktpa (>20% growth in total supply) of total high-pressure acid leach (HPAL) capacity being deployed before 2030, to supply the battery industry with nickel-/cobalt-bearing feedstock.
All up, Indonesia’s current rate of almost 2 mtpa of contained nickel production/exports represents 57% of the world’s mined nickel; 45% of its refined supply; 6% of total stainless-steel supply vs. 2014’s corresponding global shares of 8%, 1% and 0%.
Rainforest resources
Ok, so there’s spectacular industrial and trade growth being reported for Indonesia’s economy. But do ‘green-minded’ EV drivers worldwide know that the nickel in their car’s battery probably comes from beneath a rainforest? For, Indonesia’s key nickel mining operations are located on the tropical island of Sulawesi, with minor operations on the neighbouring islands of North Maluku and Kalimantan.
To access and process Indonesia’s nickel-bearing lateritic ores (deeply weathered geology; high iron-and clay-content; grades 0.8-1.2% Ni), all operations require substantial rainforest areas to be cleared, before ore processing and overburden/waste disposal capabilities can be installed.
To summarise the irony here: oxygen-producing, fauna-/flora-rich rainforests of Indonesia are being cleared to access a particular metal – that is being isolated by a massive, still-growing, coal-fired refining industry – used in EV batteries, which we’re told will help us reduce our impact on the global environment.
Price of being ‘green’
What can be done to reduce the environmental impact of Indonesia’s nickel mining industry? Yes, its mining practises are already overseen by various government authorities. But even tightly regulated activities can report large-scale disasters. Just last September, authorities of Indonesia’s North Maluku sought to suspend operations at its nickel mines on unresolved environmental issues.
Could a market-based solution mitigate Indonesia’s mining risk? In recent years, we’ve seen a pricing phenomenon appear in global commodity markets: the ‘green’ premium. Those metal producers who can demonstrate that their brand carries ESG-friendly features (relatively small carbon footprint, non-artisanal sources, etc.) can be awarded a green premium (e.g. aluminium, copper, cobalt, steel).
Right now, the key demand growth driver for Indonesia’s nickel is Battery World, less so its traditional end-use of stainless steel (>70% of all first-use). It follows that if the global EV industry ever seeks to ‘green badge’ its raw materials supply chain (principally, copper, nickel, lithium, cobalt), the policy could undermine the demand of Indonesian-sourced nickel – given its rainforest provenance.
Supply at risk
Realistically, any ‘green’-prompted structural shift would probably take years to report to the world’s nickel trade, particularly given this metal market’s heavy dependence on Indonesia’s supply. Nevertheless, the EV-related portion of Indonesian nickel supply at risk of such a policy shift can be estimated:
- Indonesia’s nickel supply: 2024 total of 2 mt of contained mined nickel (up 5%YoY; 57% of global total supply); 1.4 mt of refined nickel (metal & intermediate; +6%YoY, 39% of global total).
- Indonesia’s Ni-bearing stainless steel: produces 100% 300-series (8% Ni) stainless steel; 3.5 mtpa, requiring 300 ktpa nickel (incl. conversion loss).
- Residual flow for battery demand: therefore, refined supply minus stainless steel’s nickel requirement implies that a maximum 1.1 mt of residual nickel supply, or 30% of global mined supply, is both available to the battery industry and at risk of being marginalised by ‘green badging’ of EV World’s Indonesian nickel source.
- Ex-Indonesia’s nickel projects: what portion of Indonesia’s nickel production can be replaced by other sources? Based on current reports of credible mine projects, we estimate >500 ktpa of contained metal output (15% of global total mined) from 24 projects (Australia, Brazil, Canada, Cuba, Finland, South Arica, Tanzania, US, Vietnam, etc.) – or about half of Indonesia’s ‘at risk’ supply.
Nickel’s fundamental outlook
- For 2024, we forecast total global refined nickel demand of 3.1 mt (down 6%YoY), and total global refined nickel supply of 3.5 mt, implying a substantial market surplus of 0.4mt (13% of demand).
- Nickel’s metal price has remained under pressure throughout 2023, down 45% to below US$17k/t-$7.5/lb, partly on weak fundamentals (Indonesia’s nickel pig iron and sulphate surplus), partly on central bank inflation-targeting rate hikes (lifts cost of metal exposure).
- Price falls across nickel’s tradeable products are now exposing the industry’s high-cost assets: Sep-2023, GLEN cut funding 25 ktpa Koniambo; Jan-2024, BHP flagged cost controls for Nickel West + Wyloo Metals’ Kambalda closures.
- We remain nickel price bears on US Federal Reserve’s persistently hawkish cash rate policy, China’s weak economic activity, and Indonesia’s relentless supply growth.
