Eric: Welcome to The Charge episode four and well, let's call it three and a half. Because this is an episode we didn't know was going to happen. Though, maybe we should have. You see in the middle of a podcast series all about nickel and its incredible potential, something very big happened. It blew up. For some context remember this quote from episode three.
[00:00:19] Bob Morris: If you look at even the median projections of growth for nickel over the next 10 years, the growth is astounding. So you could see $30,000 per metric ton. We could see 35 or $40,000 per metric ton. We don't know.
[00:00:35] Eric: Well fast forward just a few short weeks. Nickel prices have jumped from the mid thirties to the forties.
Then overnight to a hundred thousand a ton. For reference, the previous high was 51,000 in 2007. This insane surge in price forced the main exchange for nickel trading, the London Metals Exchange, or LME to halt trading on March 8th and cancel billions of dollars worth of trades. That didn't go over well.
Unprecedented doesn't begin to touch what happened. So the question is what happened? We turned to Bob Morris to help answer this question and to give his point of view on what to expect for the future of nickel trading. Bob is an expert in base metals trading in markets and the former vice president of worldwide base metal sales for Vale, the giant Brazilian mining company. Here's some of that conversation.
So Bob, I have to ask the obvious question here. Was this incredible spike in nickel prices related to Russia's invasion of Ukraine? Or are there other factors at play here?
[00:01:27] Bob Morris: Yeah, well, I think it had, you know, that had parts to do with it, but I say it was more or less the straw that broke the camel's back.
There's been a lot of movement in the nickel market recently as a result of the pressure on the EV market to secure enough nickel markets to secure these batteries that are going to be required for the cars. And I think the situation in Russia, which is, you know, a large supplier of pure nickel, the stuff that you need for EVs. It wasn't big enough unto itself to, you know, to be the major cause of the overflow.
[00:02:03] Eric: How large a role does Russia play?
[00:02:05] Bob Morris: Well, they've got about it varies, but when you talk about the class one nickel that's required for EVs. It's about six to 7% of world supply. But the fact is though that, you know, the Russians are not under sanctions for their nickel. So theoretically, they can sell that nickel on to international markets and failing that certainly they could sell that through into China, which was a major market for them anyway. So it was really an event that I would say spook the market into doing what it did.
[00:02:37] Eric: Okay, how does this volatility in the market affect companies like Tesla or battery manufacturers? Should battery and automakers be concerned about their security of supply right now?
[00:02:48] Bob Morris: Well, you know, I think they should have been concerned about that since 2016, when we started to see the writing on the wall that future supply was unlikely to keep up with demand. And we've been seeing this get even more and more clear over the past three or four years. So there was, I think there was always an element of concern.
Now with this particular event, I think only time will tell. There is enough nickel in the world, at least in the ground, to support the EV revolution. But it's getting it out fast enough and getting it into the hands of the battery manufacturers and the EV manufacturers to get these cars on the road.
So there will be a continuing pressure on supply to make this happen. But I don't want to make it sound like things are overblown. $100,000 nickel was never a real price. It's the result of what we call, but then it's an official term by the way, a broken market on the LME. Where liquidity dried up and it pushed prices up to levels that are completely unrealistic going forward.
Now I think for the customers of nickel, whether it be Tesla or other battery producers, they're going to have troubles trying to sort out their current supply contracts they have, because the only reference price that is actually used throughout the world for nickel is the LME. And then when you have eight days when it's being closed down and you have these unrealistic price levels that were hit. I think there's going to be some short-term pain between producers and consumers on exactly how they're going to settle these prices in the interim period.
But I think it just elevates the concern that's already been out there. I think, you know, for the average person that doesn't watch nickel all the time, this may have been, it seems like a catastrophic event. But in fact, it's been brewing for quite some time.
I think that more investment needs to be done on the mine level. And it needs to be done quickly. And we're starting to see companies like Ford, GM, Tesla, Volkswagen, start to actually look at investments at the mine, versus just trying to find supply out there in the market as it is. So there's movement.
Yes. There's concern. But at the same time, I think the market is starting to do the right things to ensure that, you know, in the next five to 10 years, there's going to be enough supply out there for everybody to be in a position where you can buy an electric vehicle without having to pay an exorbitant amount for the minerals inside the battery.
[00:05:12] Eric: What are the effects of Russia's invasion of Ukraine on north American battery materials and supply chains? If companies don't want to use Russian nickel, how do they feel about relying on China?
[00:05:23] Bob Morris: Well, that's the thing. And if it's not relying on China, it's relying on Indonesia, which is a major nickel supplier as well.
I mean, luckily, in North America, we do have a healthy nickel industry. We've got companies like Sherritt, like Vale. We've got Glencor. They're all producing nickel in Canada. And they're actually getting quite focused on trying to ensure that their EV related customers are going to be set. But there's still a shortage.
You can take Russia right out of the equation. Russia was never really a big supplier of nickel to north America in the first place. It was quite marginal, but you know, when you have a tight market, everything has an impact. So overall it's not really a Russian story in North America. It's really, Hey, we've got to get more nickel units on the market.
What are we going to do as an industry to hasten the development of, of mines and refining assets. That there's a lot of talk about it. Everybody's trying to work to localize the supply chain. And that is to be able to process and mine and do everything, you know, on the continent.
That's going to reduce costs and ultimately reduce the carbon footprint. But, you know, it's, it's kind of a thing. It's a little, it's a little bit too late in the near term. So don't expect that pain to go away for the next two or three years. I guess the silver lining is, is that, you know, it's happening and eventually we will, we will move to what we call more of a balanced market.
[00:06:53] Eric: Yeah, this is a really great perspective. Bob. The London Metals Exchange was closed for over a week. What does that mean for future nickel trading?
[00:07:01] Bob Morris: Well time will tell. So like any market, confidence plays a huge role in the ability to have what's called a fair and free and highly liquid market. The LME as the predominant futures market for nickel has taken a massive confidence hit.
They made, in my opinion, several fundamental mistakes over the course of the last three weeks. And it does open the door for other exchanges, such as the CME, the Chicago mercantile exchange, which is a futures market for a number of different commodities worldwide. They're very large, but you know that the Shanghai future exchange as well.
So look to other mechanisms, market players, to come in here and try to fill that void. That there's irreparable damage to what happened on the LME when a market breaks like that. And they're going to have to do a lot of things right going forward to get to a level of normalcy. And to build back their credibility if they want to be the predominant clearing market for nickel.
So I expect other players to come in there. It's going to take time, but it's going to leave, it's left a sour taste in a lot of investors and a lot of producers, consumers' mouths as to why this thing happened over the course of the last three weeks.
There's, you know, there's talk about the LME being owned by the Hong Kong exchange. Did it favor some of these big investors that put short positions in the market? And that, that, that hasn't been quelled yet. And I don't think it will. Um, there are several billions of dollars of trades that were, that were executed in a fair manner that were reversed. And that's going to take time to settle out and expect others to try to either co-exist with the LME or to become the predominant futures market.
[00:08:54] Eric: I guess the hundred thousand dollar question is what's the opportunity for investors here?
[00:08:58] Bob Morris: Well, I think we've got to see where the real price is. We don't know yet. So how it's worked since the LME opened a few days ago is they put limits on price movements. Initially, any movement up or down by 5%, the market stopped.
It's kind of a circuit breaker. And then they moved that to 8% the other day. And since that started, the price has moved down to the limit very, very quickly in the trading day. So expect that to continue to go downward until we find an equilibrium. The Shanghai and the Exchange, nickel is trading at the equivalent of $31,000 us per ton.
So you use that number as kind of a potential where price discovery is and where that price should be. It's probably take another week, but I mean, $31,000 nickel in my view is a good price. And what I mean by that is that it maintains the health of producers of junior miners that are trying to attract money. As well as for the consumers that need to buy this stuff, whether it be EV or, or stainless steel it's not going to create too much demand destruction as we call it in the industry at that level.
So to me, that level is kind of a sweet spot between 30 and $35,000 per ton. But if you're, you know, as for an investor, if you're looking to make a move, one of the interesting things is, is that the underlying stock prices of a lot of these miners did not move anywhere near as aggressively as the actual exchange price. Which leads me to believe that there's probably more upside for a lot of these miners going forward that are producing nickel and have byproducts of cobalt and things like that.
Because I think that these levels, a lot of them are, are undervalued. And if they get the investments that they need from the market or from private investors, I think you'll do pretty well.
[00:10:44] Eric: Anything else, Bob, in your opinion, that we should be keeping an eye on or know about or anything else that's really interesting about this very interesting topic right now?
[00:10:53] Bob Morris: Well, I think over the next three weeks, the story is going to play out and things will settle down, but you know, really the bottom line is nickel is a really important element. And we need, we need more of it. We don't want to kill the goose that laid the golden egg. And to do that, we need prices where both buyers and sellers are reasonably happy.
[00:11:14] Eric: Bob, you're a pro. It's been a pleasure speaking with you both these times.
[00:11:17] Bob Morris: I really appreciate it. Thanks a lot.
[00:11:19] Eric: Thanks so much. All the best.
Nickel prices skyrocketed to unimaginable levels. And while most attributed this to Russia's invasion of the Ukraine, the timing definitely made sense, that wasn't necessarily accurate.
Yes. Russia's invasion played a role, but as Bob pointed out that wasn't the cause. Russia just doesn't have that kind of weight in the nickel world, which feels kind of good to say. The truth is this whole thing has been building for awhile and Russia was more of a straw breaking the camel's back.
Really it's the incredible rise in demand for nickel caused by the surge in the EV industry that's pressuring the market. And it's going to continue to do so. As Bob said, there's enough nickel out there to support an EV revolution. The challenge is getting it out of the ground fast enough to meet demand. This is why so many big players like Ford, GM, Tesla and Volkswagen are starting to consider investments at the mine level.
There has been a lot of good progress in the nickel world. So where does this recent upheaval leave us? Well, clearly the current price for nickel is not sustainable or realistic. But it's important to recognize that it does in part reflect a very real demand potential and investment opportunity. Prices should eventually reach a healthy equilibrium good for both producers and consumers.
But the fact is nickel demand will always keep the pressure on. So we'll keep watching to see how it all unfolds.
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