Post Covid Switch to EVs - Nickel Demand Increase and Supply Shortages (Mining) (LON:AMC)

At over $20 billion dollars a year, nickel is already one of the world’s most important metal markets. However, with the rise in demand for electric vehicles, nickel is potentially on the cusp of a fundamental supply shift where quality over quantity comes crashing to the fore.

That’s because not all nickel is created equal.

Approximately 62.4 percent of today’s nickel supply is nickel laterites, which produce products such as nickel pig iron and ferronickel. While abundant, these low-grade metals are inadequate for battery manufacture. Instead, the growing demand for EV battery components must be met by higher-grade––but much rarer––nickel sulphides, which produce such products as nickel metal and nickel sulphate.

• Only 15kt of nickel was sourced from finished (Class 1) nickel in 2017; a single Chevy Bolt features 23kg of nickel in its battery.
• Future battery chemistries are expected to contain more nickel, not less­­––comprising up to 80% of the battery cathode mass used by companies like Chevy and Tesla by 2020
• Source: Nickel: The Secret Driver of the Battery Revolution

Class 1 nickel (high purity) and Class 2 (lower purity) nickel and sulphide ore versus laterite ore

Class 1 nickel is the high purity nickel that is used in electric vehicle lithium ion batteries. The stainless steel industry uses both class 1 and class 2 (lower purity) nickel, and is the main driver of nickel demand.

The nickel sulphide ore deposits are the better source for class 1 nickel needed to make nickel sulphate for EV batteries, and typically have significantly lower production and CapEx costs. Class 2 nickel from nickel laterite ores can be converted to nickel sulphate however it requires high pressure acid leaching [HPAL], which is expensive with much larger CapEx requirements. Much of the laterite ores come from the rim of fire regions such as Philippines, Indonesia [PNG] and New Caledonia. Most of the sulphide ores come from Russia, Canada, and Australia.

McKinsey state in their November 2017 report, The future of nickel: A class act (emphasis added):

"Currently, class 1 nickel supply suitable for battery production represents approximately half of global supply of 2.1 million metric tons [MT] – although only 350 metric kilotons [KT] is available to be processed into powder and briquettes that could be used to produce nickel sulphate (in 2017 approximately 65 Kt to 75 Kt of nickel content will be used to make nickel sulphate). With annual EV production expected to reach 31 million vehicles by 2025, demand for high-purity class 1 nickel may increase significantly from 33 Kt in 2017 to 570 Kt in 2025. This comes on top of class 1 demand from traditional end-use segments i.e., plating, foundry and super-alloys. A shortfall in class 1 nickel production seems increasingly likely as current low nickel prices do not support class 1 nickel capacity expansions and alternative strategies e.g., shifting existing production from nickel cathode to nickel sulfate or refining nickel intermediates, seem unlikely to provide long term solutions. As a result, not only will nickel prices likely need to move towards incentive pricing but the future pricing mechanism is likely to reflect two distinct nickel products: class 1 and class 2.

A shortage of class 1 nickel will likely see pricing revert to incentive pricing levels required for the introduction of new capacity or the reopening of mothballed capacity. These incentive pricing levels will need to be above current nickel prices and could increase significantly if the supply-side response is slow. At the same time we expect to see two distinct nickel price mechanisms emerge reflecting two distinct commodities: class 2 nickel, primarily for use in stainless steel production, trading at a lower price that reflects its abundant supply; and class 1 nickel trading at LME prices – or above for high-end nickel powders and pellets used to make nickel sulfates – reflecting required incentive prices.

The key thing to understand here is that the nickel sulphide ore miners have a distinct cost advantage when producing the nickel sulphate required for EV batteries.

This is where I think Amur Minerals (LON:AMC) fit in https://www.stockopedia.com/share-prices/amur-minerals-LON:AMC

They are sitting on 1.58 Million Tonnes of Class 1 Nickel and one of the Top 9 known Nickel Deposits in the world and currently sitting with a pretty small market cap and current share value considering the shear scale and quality of their asset.

See below map.

Nickel outlook - demand v supply

Demand

By far the main demand source for nickel is stainless steel. This means nickel demand will continue to be driven largely by global construction demand, still led by China for now. However, what is significant is that increasingly new demand will be driven from lithium-ion battery demand, fueled by growth in electric vehicles and energy storage.

My modeling shows the following effect of EVs on nickel demand

• Assumes that by end 2020 light electric car sales can reach 5 million pa. Based on 36 kgs of nickel per electric car that equates to 180,0000 tonnes pa of nickel required to feed electric cars in 2020, or about 7% of total nickel demand up from almost zero in 2015.

The message here is that nickel demand from surging electric car sales will start to become significant by 2020 at ~7%, more important by 2025 at ~17%, and very significant by 2030 at 26%.