Insight

By Gary Peters, director, The Metals Warehouse

Last year the commodity industry witnessed a lot that you can consider unprecedented. The tip of that iceberg was what happened to nickel during the first half of 2022, when it increased to a price on the London Metal Exchange (LME) that had never been seen before, leading to trading being ceased, for days, before finally being reversed. 

One of the biggest nickel producers on the planet had bet heavily on the nickel price falling. When their short position was squeezed, the nickel price soared, reportedly resulting in an US$11 billion trading loss. All in all, it was a bit of a mess.

The result of that crash was the implementation of a tolerance – one that allowed for a 15% fluctuation in the price either way – to prevent huge spikes or drops similar to that which happened back in March 2022 from happening again. The rule was simple: If the price superseded that 15% the market would cease trading for the remainder of the day. However, it seems to have done very little towards restoring confidence in traders, as prices are still fluctuating aggressively.

In December, nickel rose significantly – to as high as US$33,000 before dropping again to US$28,000. So, with Christmas and New Year out of the way and business back in full swing, what’s going off with nickel and what ramifications will it have on the rest of the metals market in 2023?

What were the factors behind nickel’s increase?

There are two big reasons why the price of nickel swung so heavily before the end of 2022. The first is the growing confidence in the EV market and short-term predictions on demand and production. The demand for nickel in that market is only going to continue to increase.  Projections show that global sales of electric passenger vehicles are projected to surpass 10.5 million, exceeding 2021 levels by about 4 million. By 2030, electric vehicles are also expected to occupy 40% of global sales of new cars. 

However, this shift to EV is not isolated to the UK. It’s global, every country around the world is jostling for the same supplies and materials to facilitate their ambitious move.

With each passing year, the technology supporting this transition continues to improve in quality and increase in volume, making it more readily available. Generous government initiatives, like the introduction of subsidies and tax credits, are also becoming the norm – making it more appetising for consumers to embrace the technology.

This is the dominant factor in the supply and demand conversation and will be for several years to come.

The other factor to consider is China coming out of lockdown, although the country’s battle with Covid-19 continues to be incredibly unpredictable. The latest reports show that approximately 900 million people (64% of the country’s population) currently have Covid-19, with that number continuing to increase since the easing of lockdown measures in the final quarter of 2022.

China’s manufacturing economy over the last three years has been hit hard and it’s clear they are attempting to push through this situation to get back to normal. That easing of the restrictions created renewed confidence and led to people investing in nickel once again, which naturally drove the price up.

However, that price is higher than what natural supply and demand would justify. That has led to longer term projections believing prices will fall back in 2023, while the even longer market forecasts for nickel’s value state it will slowly increase with the ongoing demand from the EV market.

What does all this mean for 2023?

If 2022 taught us anything, it is that nothing is linear. Forecasts never account for the unforeseen and, ironically, the most foreseen circumstance we have is that there are always unforeseen circumstances. 

Right now, it is impossible to commit to any projections or forecasts – especially for months or even years ahead of the position the industry is currently in, in my opinion.

However, we can begin to paint a picture of how the first quarter of this year will unfold:

1. The price of nickel could increase further: The first thing we will see is a gradual increase in the price of nickel, with peaks and troughs in between, due to China’s economic recovery post lockdowns. However, China and Indonesia will possibly increase nickel production by 20% in 2023. This could create a surplus, which would undoubtedly put pressure on nickel prices.

2. Other commodities, like aluminium, could also see price rises: What is possible is that we will see these price increases with nickel reflected elsewhere across the market, with stainless steel and aluminium also seeing price hikes. Where it has smoothed off slightly in the UK is that a lot of stainless steel and aluminium is imported from the Far East and traded in dollars. After initially plummeting to a two-year low, as a result of the disastrous UK Government mini-budget, the exchange rate has recovered and the UK is getting more for its money again – albeit at rates that are still as high as we have seen for a long time.

Container rates have also dropped back to pre-pandemic levels. You don’t have to stretch your memory too far to recall paying US$20,000 for a container. That has since returned to US$2,000 but remains part of the cost of importing stainless steel and aluminium, which is reflected in the final price it is sold for. 

3. The correction in stock levels could lead to mills passing on their price increases: With energy costs soaring, the cost of production is considerably higher than it used to be. However, for the latter part of 2022, that price hasn’t filtered down from the mills to the customer – a result of the amount of stock that has built up since the beginning of the pandemic. After initial shortages, there has been so much stock in the marketplace that the mills have felt they haven’t been able to pass on these increases earlier – because they’ve just needed to move the capacity that has been built up. That situation is the same right through the supply chain, filtering down to distributors and customers. Because prices have been going up for the last two years, it has been a rock solid investment to buy more stock than has necessarily been needed. However, that has now changed and stock across the market has nearly been corrected. As a result, we could see the base price from the mills increase in the first quarter.

Final thoughts

Over the longer term, it’s hard to predict what will happen with the price of these commodities. In the UK, it is looking increasingly likely that the country will enter a recession – if it isn’t already in one. If that happens, people will spend less and everything will come down to supply and demand. 

If distributors aren’t seeing huge demand for certain products, that is going to make them more competitive to win the business that is on the table. By this, I mean we cut our margin and the price falls. The first quarter of 2023 has a lot of uncertainty surrounding it. The prices are almost certainly going to be rising, but how that then runs through from whatever businesses have paid, to the price they sell it at, is anyone’s guess.