Getting Your Nickel’s Worth – The Fate of the Clean Energy Revolution

Mobeen Tahir, WisdomTree Europe’s director of macroeconomic research & tactical solutions, joins us for a discussion about the catalysts driving nickel’s recent volatility, including Russian export supply disruptions, futures trading, and inflationary pressures. We also explore challenges facing the auto sector – namely electric vehicle and lithium-ion battery production – as well as uncertainties over the future of the global energy transition.

Summary – Traders’ Insight Radio Ep. 13: Getting Your Nickel’s Worth – The Fate of the Clean Energy Revolution

The following is a summary of a live audio recording and may contain errors in spelling or grammar.  Although IBKR has edited for clarity no material changes have been made.

Steven Levine

Hello, and welcome to IBKR Traders’ Insight Radio Podcast. I’m Steven Levine, senior market analyst at Interactive Brokers, and your host for today’s program, where Mobeen Tahir, director of macroeconomics research and tactical solutions at WisdomTree Europe, joins us again to talk about catalysts that been driving prices for certain commodities.

Our focus today is on nickel, another critical commodity for use in the ongoing energy transition.

Mobeen was last on our program where we had a very insightful discussion about copper, so nickel seems to be the next logical step in the transitions metals block: it’s a neighbor to copper on the periodic table; it’s also a vital element for use in electric vehicle production, namely batteries, but also critical for clean energy production such as wind and solar, as well as carbon capture and storage.

Very happy you’ve made the time to join us again, Mobeen, thanks for coming.

Mobeen Tahir

Steven, a pleasure as always to join you again. Thank you so much for having me.

Steven Levine

We recently had this great discussion about copper and its role and outlook in the energy transition. But copper alone can’t drive that move, right? I mean, other commodities are also needed, nickel being one of them, and nickel futures seem to have been facing quite a bit of volatility lately.

Not only has the Russia-Ukraine war called into question the viability of supply that may be needed to meet the timeline and goals of the global energy transition – Russia, I understand has a high concentration of the world’s production and reserves for nickel – but we’ve also seen certain trading activities spur a rather significant spike in the price of nickel futures, and I think we can talk about that a bit later. But I’d like to first start off with your insights about supply issues, and there are obviously lots of questions here, but let’s begin with sanctions on Russian exports.

I guess for one, how much nickel is needed to fulfill the demand for, say, electric vehicle battery production over the short-term, say the next two to three years, and what can suppliers of nickel expect to experience from any constraints from these sanctions?

Mobeen Tahir

Sure, thanks Steven, and it’s a great place to start. If we think about how much the world has actually demanded in nickel in the last year or so, the estimates were that the world demand for nickel in 2021 was around 2.8 million tons. Now, this number has broadly doubled in the last 10 years or so. Having said that, batteries currently only account for around 6-7% of total nickel demand, but they happen to be the most exciting area of growth, which is why a lot of focus tends to go there when we talk about nickel, certainly.

Now, you mentioned electric vehicles and their relevance with the nickel story, of course. The world sold 6.7 million electric vehicles in 2021, up from 3.2 million in 2020, so we’re on an exponential trajectory over there, certainly. There are, however, two things to remember when it comes to metals and those two things are as follows: number one, it’s very difficult to substitute one metal for another because, clearly, they have unique physical properties; and two, it’s very difficult to replace one source of supply with another as well. And putting all of that together, what we’re seeing is an exponential demand trajectory for nickel. And of course, any supply disruption, as you touched on in your question, any supply disruption that happens in the face of those demand projections, is naturally going to pose challenges.

Steven Levine

Yeah, I can imagine. So, let’s say that trade with Russia becomes trade with another country or other companies in other countries, for the supply of nickel that we would have otherwise gotten from Russia.  How does this shape U.S. trade then? Does it change? Does it significantly change?

Mobeen Tahir

That’s an interesting question, and an evolving question, certainly. If we think about how much capital expenditure has actually gone into nickel mining in the last 15 years or so, the number comes to around 85 billion U.S. dollars. Now, if the world is to meet its sustainable climate change goals and limit temperature increases to two degrees Celsius above pre-industrialized levels, as agreed in the Paris Agreement, the capital expenditure in the mining sector needs to almost double and go up to 150 billion U.S. dollars in the next 15 years, compared to the previous 15 years.

The question is: where does this come from? And this goes to your question about how does the U.S. manage its trading relationships, but ultimately the question will be where is the nickel actually coming from?

Indonesia, of course, is one of the largest producers of nickel. It also happens to be the country which has the highest number of reserves. But behind Indonesia we have Australia. Australia is the second largest in terms of reserves, but it’s a bit behind in the league tables as far as production is concerned. So, that raises the question: is it going to be those countries that have more reserves that may start mining more as they start to see that there’s more demand and potentially disruption from certain regions? But it’s a difficult question to answer, and it’s an evolving conversation, certainly.

Steven Levine

This is very interesting, because I know that a lot of corporations, especially the auto sector, has been relying on nickel to produce their electric vehicles … the batteries for their electric vehicles for their electric vehicle production. They’ve had strategies to ramp up to meet the demand that you’ve outlined – from 3.2 to 6.7 million in in new electric vehicle sales.

In your view, has the outlook changed for costs on EVs? I mean, are these going higher in your view? I suppose we need to factor in higher energy costs for transport and other manufacturing concerns. Also, problematic supply of semiconductors has been in place, so now this seems to confound the issue. I’m thinking, what do you see in terms of inflationary pressures on the electric vehicle production end for corporations?

Mobeen Tahir

Absolutely, and intuitively, one would think that as input costs go up, this would create inflationary pressures. This would create pressures on the price of electric vehicles as well. But just putting that in a bit of context, where is nickel actually used in electric vehicles? For your listeners, it would be useful.

The industry uses nickel in battery manufacturing for electric vehicles, typically in lithium-ion batteries nickel is used. Now, lithium-ion batteries can have varying chemistries, but the preference in the industry is to use more nickel-dominant chemistries. Not only that, the preference is to use higher loadings of nickel in these chemistries as well. What that does is it gives these batteries more energy efficiency. So, if you think about the worst nightmare for an EV driver would be to get caught on the highway and run out of charge and not know what to do from there, right?

Steven Levine

Yeah, that would really be a nightmare, I think, unless they have a portable generator. I don’t know what they would do? I guess they need a very long extension cord to attach to the next charging station. What do they do?

Mobeen Tahir

It is one of the things that holds a lot of people back from moving towards an electric vehicle right now, and, of course, there need to be more solutions to tackle that eventuality, or drivers knowing better how to manage their energy. But, ultimately, what’s happening on the battery manufacturing front is batteries are getting better. So, they are starting to deliver higher range – and higher quantities of nickel are enabling batteries to become more efficient. So, hopefully, fewer stranded drivers on highways going forward as we employ more nickel.

But coming back to your question about cost. Even though we see the cost of these resources rising – nickel, copper, aluminum, and many others – we think that economies of scale in the battery manufacturing process is ultimately going to more than offset the increase in the input cost of these various things, and this bodes very well for the economics of the electric vehicle industry, and we think that that will ultimately be what will really support the proliferation of electric vehicles on the roads.

Steven Levine

I suppose that another concern for buyers, or potential buyers, of electric vehicles is the price tag currently as far as I understand? According to Kelley Blue Book, and this survey done by Kelley Blue Book [in] 2021, consumers paid on average close to $60,000 for a new electric vehicle, and this was a premium of about 20% over gas-powered vehicles. And they noted that among new car shoppers, 38% were willing to consider an EV, but that number dropped to 21% when they were asked if they were more than half confident if their next vehicle would be an EV.  Only 3%, according to Kelley Blue Book, said that they were certain that they would buy one.

So, the question here is: at what price point … say that there are inflationary pressures going forward, and I’m just challenging to say that perhaps it goes above the $60,000 average … at what price point would demand for these EVs, do you think, start to fall off in terms of the near-term projections for how many EVs would be bought? Or is there research that suggests that consumers really are willing to pay for an electric vehicle to combat climate change to reduce carbon emissions really at any cost?

Mobeen Tahir

Sure, it’s a fascinating study, and I would hope that if they redo the study in a couple of years, some of those statistics will improve in favor of electric vehicle adoption. And the reason is this: we partner with Wood Mackenzie, who are an expert in the energy transition space, and they’ve come up with this forecast that battery costs are declining, and they are expected to halve within the next 5 to 7 years.

Now, just putting this in context already in the preceding five years, they’ve halved already, so we’re just continuing on that path. As I was mentioning, economies of scale, new technology takes off … and that has cost reduction. Ultimately, the industry is expected to reach a very important cost threshold, which is 100 U.S. dollars to produce one kWh of energy, and this threshold is considered by participants in the industry as a threshold which will make electric vehicles’ batteries economically viable. Not just viable for their own sake, but viable in terms of all the applications that use those batteries as well, and electric vehicles are certainly one of the key applications.

So, what we would expect that when that happens in the next two to three years, when we hit that threshold, $100 per kWh, that’s expected to happen somewhere in the next two to three years. Once that threshold is hit, we would expect that the lifetime costs of electric vehicles, compared to internal combustion engine vehicles, will probably come to a parity.

Even at that point, people will probably still be paying more upfront for an electric vehicle, as is the case compared to a similar petrol or diesel car, but you would have enough savings over the lifetime of maintenance, because you save from fuel costs and, hopefully, your electricity is cheaper.

And that saving will mean that the lifetime costs come to a parity between electric vehicles and internal combustion engine vehicles in in the next two to three years. Now, what will facilitate adoption from consumers is: one, definitely the cost element; [and] two, hopefully, more charging infrastructure. So, as you said, we want to avoid the nightmare scenario of people getting stranded on highways. Some better charging infrastructure and hopefully more models coming out into the market, cheaper variants, and more affordable variants, in all sorts of price ranges as well.

Steven Levine

This is really the question, and we’ve seen this picture of projections before the [Russia-Ukraine] conflict, and before export constraints. So, the question really is: with uncertainties over supply, and uncertainty over demand, do the milestones that were set out prior to this conflict change? Is this two to three years still viable? Or are we looking at a longer-term or more uncertain future for how this trajectory will go for electric vehicle production and demand?

Mobeen Tahir

It’s a fascinating area to consider. The timelines are changing, certainly, but one thing to observe is that the timelines appear to only be moving in one direction, certainly as far as policy is concerned. So, it is unlikely that we are going to see our climate change goals getting pushed back – after all the talk with the United Nations Climate Change Conference that was held late last year and all the commitments from leaders around the world to really accelerate the energy transition. It seems that those goals are only going to get brought forward. And most recently, even with the Russia-Ukraine crisis, we’ve seen that this is perhaps even catalyzing the commitment towards climate change.

Germany most recently has come out and said that it’s pushing ahead and turbocharging its transition towards 100% renewables by 2035 – that is 15 years ahead of what was previously envisioned. And yes, it’s partly because Europe wants to reduce its reliance on Russia’s fossil fuel, but ultimately, it’s about reducing reliance on fossil fuels altogether. And what policy does is it paves the way for industries to thrive. So, battery manufacturing, mining of these various minerals, production of electric vehicles, all of these industries that sit within the value chain of the various things that you and I ultimately consume. Whether it’s vehicles, whether it’s mobile phones, which have nickel-based batteries as well, all of these industries are supported, and they enter an environment where policy is paving the way for them to grow.

So, hopefully, we think that that is expected to continue. Geopolitics can be a disruptor; they’ve added a new risk factor for investors to consider. Naturally, if disruptions continue for a prolonged period, this could move from being a risk factor to something that investors have to consider as a base case scenario, but we hopefully aren’t there yet.

Steven Levine

Let’s change tack here just a bit, because I think another thing that’s confounding, at least the cost for nickel, is trading activity. And we’ve seen this pretty recently with the chair of a Chinese steel-producing giant called Tsingshan Holding.

Nickel futures spiked around 250% over 2 days, and this prompted the LME to halt trading, set limits, and I think even some banks stepped in to inject liquidity to try and stave off a potential default of the company. It faced something like an $8 billion loss.

They were going short on nickel. So, the chair, Xiang Guangda, committed to the short even after the short squeeze … even after it’s pushed prices through the roof really. He didn’t change his position. So, what do you think was behind these particular trader’s, this chair, his decision to short nickel futures? How would nickel prices go lower in this scenario?

Mobeen Tahir

Sure, so the background to Tsingshan trade is as follows: Tsingshan is one of the largest Chinese nickel and stainless-steel producers – a very important player worldwide in nickel production and stainless-steel production. Now, in recent times, the company has actually been exploring ways of producing higher-grade nickel, the sort of nickel that is used in electric vehicle batteries from lower grades of nickel.

So, not just accepting that you are constrained by how much higher-grade you can bring out from the ground, but actually converting lower grades into higher grades through various industrial processes. So, this is a technique that the company has been pioneering in recent times. But there are question marks on how much success you can have with that sort of process. So, markets have been hesitant in pricing in the impact that the company can have on the nickel market from this process. But ultimately, the short position that they’ve held is essentially a bet from the company on their own success of bringing more quantities of nickel to the market from this process, because, if you think about it, if that’s their business model, they’re converting lower grade nickel into high-grade nickel, they are increasing the supply, or at least that’s what they are aiming to do, and higher supply means prices go down, and that’s what they were betting on.

So, ultimately, it’s more of a commercial position that they took, which is linked to their business. Of course, the geopolitical tensions with Russia and Ukraine, Russia being the third largest supplier of nickel, it created this unprecedented situation in nickel markets, where prices were really rallying and therefore their short position became a bit a bit tricky and enhanced the volatility in nickel markets. So, a bit unprecedented, but of course, within the context of what the company was trying to do, it perhaps makes a bit more sense. But you would still expect that there may be still some volatility ahead for metals that are linked to what’s happening with the Russia-Ukraine situation.

Steven Levine

And with the LME … I think operations recently had another glitch even after this short squeeze took place, and that was unfortunate because they halted trading for some time and then when they reopened, they had glitches and they had to halt again.

It just seemed to be a lot of volatility simply in the trading space, which seems to confound, again, the economic picture, or the bigger picture, of supply and demand in light of the sanctions against Russia and its concentration of nickel.

It would be fascinating to see how this plays out over time, and I would love to see how the auto sector, and other companies and sectors I’m sure that use nickel – I know in steel and other alloys, but there must be other companies, other sectors out there that you are aware of that would also maybe experience some challenges because of this.

Mobeen Tahir

Absolutely. So, you’ve you mentioned stainless-steel. In fact, 3/4 of nickel is currently used in stainless steel, so stainless-steel still is the most dominant source of nickel demand. Yes, increasingly in the future, batteries will probably take up more of a share from stainless-steel. But if we think about the statistic I mentioned at the start, where total nickel usage worldwide has doubled, pretty much in the last 10 years, this is in the absence of electric vehicles. So, even just stainless-steel demand is expected to grow, and naturally, stainless-steel has all sorts of applications ranging from kitchen utensils to medical equipment, building transportation … it pretty much touches our lives in so many different ways. So, ultimately, if there is disruption in supply there, it affects many, many different sectors.

Steven Levine

It’s amazing how much commodities can impact our daily lives … and prices … and inflation in general, and it truly is interesting.

Mobeen, thank you again. I mean, this is a really, really fascinating discussion – again, about nickel – and I hope that we’ll have another one about another commodity, maybe another metal at some point soon. Thanks again for taking the time to do this.

Mobeen Tahir

Steven, pleasure as always, and thank you so much for the opportunity to chat with you again.

Steven Levine

Absolutely. Listeners, you can also learn more about the energy transition and commodities in WisdomTree Europe’s webinar presentations. They have several of them at ibkrwebinars.com. You can also keep abreast of their market commentary at IBKR Traders’ Insight at tradersinsight.news.

Again, Mobeen terrific, hope you’ll be back with us again.

Mobeen Tahir

I hope so too.

Steven Levine

Until next time I’m Steven Levine for Interactive Brokers.

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