Nickel is expected to play an integral part in efforts to decarbonise the world, as it is an ingredient in the batteries used in electronic vehicles (EV). However, the industry needs to significantly change the way nickel is produced if it wishes to be considered ‘green’.
China’s Tsingshan Group announced earlier this year that it would pivot its nickel pig iron(NPI) operations in Indonesia to service the EV market, but the rest of the industry is struggling to increase the output of nickel products suited for EVs.
NPI is one of the most energy-intensive and carbon-emitting forms of processing. While the industry on average produces 13tonnes (t)of carbon for every kilogram of metal, NPI produces 45t.
Output of NPI in China has fallen because power shortages have stalled smelters. Environmental constraints are likely to see China’s output remain tight. This is likely to see further demand for LME traded commodities in the short term and place upward pressure on prices.
ESG issues likely to constrict nickel supply for the foreseeable future
China’s efforts to restrict carbon emission are likely to upend the nickel industry.
Even before the recent power shortages, Beijing was directing the country’s heavy industry to reduce energy use and meet emissions targets. Aluminium was the first industry to receive attention. Aluminium production is energy and carbon-intensive, consuming nearly 6% of China’s electricity and emitting 12t of CO2 per tonne of metal produced. About 80% of aluminium capacity in China uses coal-fired power.
It’s not well known that China’s nickel industry is nearly the equal of aluminium in terms of its impact on the environment. The Nickel Institute calculates that the production of 1kg of nickel is associated with 13kg of carbon emissions. However, the industry has several processing routes with significantly different levels of energy consumption and emissions.
China predominately secures its nickel requirements from NPI. The process uses low-grade nickel ore that must be converted into higher-grade nickel products before being used to make stainless steel. As a consequence, it is one of the most energy-intensive and carbon-emitting processes in the metals industry.
According to BloombergNEF, ferronickel and NPI smelters emit as much as 45kg of carbon emissions per kilogram of metal. This is driven by the high energy intensity of the process, where the calcination, pre-reduction and smelting of nickel ore are done via a rotary kiln–electric arc furnace (RKEF) process
China’s NPI industry has been in a state of flux since Indonesia banned the export of nickel ore in 2019.
Indonesia provided the main supply of ore for China’s NPI smelters. Following the export ban, China relocateditsNPI processing plant to Indonesia. By offshoring its processing, China reduced the risk of export taxes in Indonesia, as well as its own emissions. But it also meansChina’s NPI output has been steadily falling
Despite sourcing more nickel ore from the Philippines, power shortages and pollution-related constraints on heavy industry in have caused NPI smelters in China to shut. From an average monthly high of 50kt in Q3 2019, NPI processing output fell to around 40kt in 2020. This has been further exacerbated by restrictions on stainless steel production. Together these issues have lowered China’s domestic NPI output to30.7kt in October
This has stimulated a wave of new investment in NPI processing in Indonesia, lifting total capacity there more than200% in the past three years. China’s Tsingshan Holdings Group, which developed the 165kt capacity Morowali Industrial Park(IMIP), has led this growth. But this has not been fast enough to replace China’s lost domestic production capacity
CommoditystrategyANZ Commodity Call | 11 November 20213Figure 3. China NPI production figure 4. Indonesia NPI production Demand for refined nickel by Chinese consumers remains strong, and imports are failing to fill the gap. Steel mills are therefore turning to the LME for nickel
imports of refined nickel products, such as briquettes, have subsequently risen sharply. October imports hit a four-year high of 35.7kt, up 160% y/y
China isn’t the only country suffering supply disruptions. The Philippines, now the largest exporter of nickel ore to China, has had a spate of weather-related disruptions. After strong growth in H1 this year, heavy rain is likely to weigh on output in H2. October nickel ore exports were down 5% y/y to 5.2mt. However, The Philippine Nickel Industry Association has warned output this year could be down 10% on 2020’s figures
Risks of further disruptions to Indonesia’soutput cannot be ruled out. Authorities are exploring the possibility of taxing nickel product exports of less than 70% nickel content, to drive the expansion of its domestic processing industry
Unprocessed nickel ore typically contains less than 2% nickel, while NPI can range between 30% and 40%. Nickel matte, which Tsingshan is producing at its IMIP facility, contains around70%, so won’t be exposed to this new tax.
With the United Nations Climate Summit in full swing, emissions from heavy industry are likely to receive increased attention. The US and China have pledged to do more to cut emissions. China had already pledged to peak its emissions before 2030. This is likely to place further pressure on the NPI industry as it tries to reduce its carbon footprint.
The steel sector has been on the radar of Chinese authorities as it accounts for nearly 46% of the country’s industrial emissions and 13% of its carbon emissions. After curtailing steel capacity in the 13th Five-Year Plan, the government added other measures to make the sector more efficient and less energy-intensive.
The subsequent power shortages have meant steel smelters in key provinces have been ordered to reduce activities. Beijing has succeeded in encouraging more coal supply, but the situation is fragile. Forecasts of a colder than normal winter combined with still low inventories of coal suggest there could be more restrictions on power over the northern hemisphere winter.
Indonesia, which recently become the world’s biggest nickel producer, is also likely to face pressure to reduce the environmental impact of the industry. Most of its nickel industry relies on coal-fired power stations. At COP26 Indonesia signed up to a pledge to end coal use, despite not backing a clause calling for an end to building and financing new coal-fired power stations.
Tsingshan has vowed to convert its plants to renewable sources of power, with initial plans to build a 2GW solar and wind farm and a 5GW hydropower plant. Together these should meet most of the power needs for the IMIP. However, the company has said when this project will commence.
New developments in Indonesia will face pressure to produce greener nickel. Tesla recently struck a deal with BHP to supply nickel for its EVs. Earlier this year, Tesla CEO, Elon Musk, said he would give any mining company a giant contract if it could mine nickel efficiently and in an environmentally sensitive way.
Even with a plentiful pipeline of projects, the carbon footprint of coal-powered plants in Indonesia may put off battery/EV manufacturers chasing a green nickel supply.
Stainless steel meanwhile is in high demand on the strength of resurgent growth from new energy sectors such as batteries. Output is expected to grow 11% to 56.5mt in 2021. Higher-than-expected Q1 output in Indonesia and robust growth in China are supporting the predicted upturn in supply.
The market for batteries is poised to explode given the rising global popularity of passenger EVs, sales of which exceeded 1.4m units in Q2 2021, a jump of 188% from a year earlier.
The passenger EV market in China grew 174% in Q2 2021. In Europe, EV sales jumped 234% in Q2 2021, at just over 576,000. As a result, 17% of passenger vehicles sold in the region came with a plug. EV sales in North America were up 208% in Q2 2021
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