Why Nickel Prices Went Through the Roof and How It Could Affect EVs

To understand why this happened, it's worth looking at how Nickel is traded, and how one man made a terrible bet.

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(Photo: The Quint)

Within two days, the price of base metal nickel rose 250 percent to cross the the $100,000-per-tonne mark and hit an all time high on Tuesday, 8 March.

It was such a drastic jump that the London Metal Exchange (LME), which is the world's largest futures and options exchange for base metals, suspended the trade of nickel.

The Russia-Ukraine war, of course, is partly responsible for this. But that has been going on for nearly three weeks and the spike in nickel price was more recent, and sudden.

To understand why this happened now, and how it will affect electric vehicle manufacturers, it's worth looking at how nickel is traded, and how one man made a terrible bet.

What Happened to Nickel?

Due to the price volatility of base metals, miners and traders often use the markets like LME to make short bets, so that even if the prices drop they will make money.

But if the prices somehow spike, traders can be hit with requests to put down more cash with brokers to back their trades (margin calls).

This is what happened to one of the largest nickel and steel producers, Tsingshan Holding Group Co, owned by Chinese metals tycoon Xiang Guangda.

Guangda had expected nickel prices to fall this year and started building a short position last year. Then Russia invaded Ukraine and his plans went for a toss.

Russia is the third largest producer of the metal after Indonesia and Philippines, accounting for 16 percent of the world’s high-grade nickel, according to Goldman Sachs.

Traders were fearful that the sanctions could disrupt these supplies and that led to a rise in prices. Tsingshan, in an effort to mitigate their short position, started buying large amounts of nickel, raising the prices even further and leading to this disaster, sources told Reuters.

The company owes billions of dollars to brokers and LME isn't sure if it has the funds to pay them back, which is why it stopped all trades and even cancelled some.

How this Could Affect EVs

Nickel, which is mostly used to produce stainless steel, is also a critical ingredient in the lithium-ion and lithium-ion polymer batteries used in most electric vehicles.

These battery cells typically have four components:

• A positive electrode (cathode) that contains a lithium compound with nickel and cobalt or aluminium.

• A negative electrode (anode), usually made of carbon graphite and sometimes silicon.

• A separator made of a porous polymer which prevents contact between the electrodes

• An electrolyte, a liquid or semisolid polymer which lets ions move between the electrodes.

Adding more nickel to the cathode increases a battery’s energy density, which means automakers can increase the range of their vehicles without increasing battery weight.

Litium ion batteries used to have around 33 percent nickel in their composition, but most have shifted to around 60 percent. The batteries that LG Energy Solution supplies to Tesla has cathodes which are 90 percent nickel, according to a Reuters report.

Demand Could Soon Outstrip Supply

Electric vehicles have recently breached the mainstream and most of the biggest automotive manufacturers have laid out plans to transition into electric. The Russia-Ukraine crisis and the subsequent rise in fossil fuel prices are also helping the switch.

Governments are also pushing for EV adoption.

India, for one, has rolled out a production-linked-incentive (PLI) scheme worth Rs 26,058 crore to boost domestic EV manufacturing, generate new jobs, and encourage investment into the sector.

There's also another PLI scheme worth Rs 18,000 crore to manufacture advanced chemistry cells (ACC), that is, batteries to power EVs.

With the rapid growth of the EV sector, analysts have warned that the supply of high grade nickel will soon fall behind demand. Analysts at Rystad Energy expect this to happen by 2024.

This will lead to a significant rise in manufacturing costs.

Morgan Stanley analyst Adam Jonas suggested that a 67 percent rise in nickel costs could represent around a $1,000 increase in the input cost of an average EV in the US, according to CNBC.

In response, manufacturers are likely looking at other ways to increase energy density and might limit high nickel content batteries to more premium offerings when prices rise.

LME Plans to Resume Trade

The London Metal Exchange, which halted nickel trading for the first time in three decades, will attempt to restart the market from 16 March.

This comes after Tsingshan Holding Group announced on 14 March that it had entered into an arrangement with its lenders under which they will not issue margin calls or close out its positions on the LME.

“As an integral feature of the agreement, there is provision for the existing hedge positions to be reduced by the Tsingshan group in a fair and orderly manner as abnormal market conditions subside,” it said.

The LME has also allowed traders to defer delivery commitments on all of its principal contracts. It hopes that these measures will bring a semblance of normalcy when trading resumes.

"The LME notes in particular that a large client of the market has now published details relating to the support of a banking consortium, which could suggest that the potential for further disorderly conditions may be mitigated," it said.

(With inputs from CNBC and Reuters)