Nickel Class 1 & Class 2 – Why Does It Matter For Investors?

Nickel is a commodity that has got investors raising their eyebrows. Diverse properties like a high-melting point (1453°C), resistance to corrosion and oxidisation, ductility, usability in alloys and an increasing significance to the EV market have turned nickel into one of the most fashionable investment opportunities. Investors in the nickel space likely already know about the two classifications nickel can find itself falling into, especially given the massive amount of coverage it has had from investment news outlets and individual strategists. However, for those who haven’t had access to the right information yet, here’s a quick breakdown.

Class 1

Nickel products that fall into Class 1 comprise of electrolytic nickel, powders and briquettes, as well as carbonyl nickel. These products are typically LME deliverable and have a nickel purity of a minimum of 99.8% Roughly 55% of total nickel mining output relates to Class 1 products.

Class 2

Nickel Class 2 is a group that comprises of less ‘pure’ nickel products. Examples of these are nickel pig iron (NPI), a version of nickel created using low-grade laterite ores and blast/electric furnaces, ferronickel, nickel oxide, utility nickel, Toniment, mixed hydroxide  and other <99.8% products. Both have a reduced nickel content and are often utilised in stainless steel and alloy steel production, where a high content of iron becomes beneficial. Class 2 products contribute the remaining 45% of total nickel mining output.   These products are not LME deliverable and must be sold to an end customer

So, what’s the history?

SOURCE: Trading Economics

After looking at the behaviour of nickel’s spot price, it is not hard to see why it has been branded as a boom/bust metal that moves in giant super-cycles.

The reasons behind this were touched upon in a recent article by a Crux contributor, stating that a primary factor behind nickel’s ascension to a high of $54,000/t in May 2007 was the rapid expansion of Chinese demand in the 2000s. However, this soaring price, driven by the need to ration available supply to meet demand, resulted in nickel becoming a victim of its own success. As prices rose, China began seeking more affordable options, thus turning to 200-series stainless steel (1-2% nickel) rather than 300-series stainless steel (8%) nickel.  As well, it began to pursue alternative sources of supply leading to the widespread production of nickel pig iron (NPI) in China using ore imported from Indonesia and the Philippines.  With this compression of demand and new source of supply, spot prices fell through a trap door.

Class 2 nickel rose to prominence at a time nickel was performing well in the market, but the consequential oversupply generated by tonnes and tonnes of NPI flooding the market created a supply/demand imbalance, crippling the spot price for many years. Nickel ore export bans from Indonesia, and proposed bans from the Philippines, didn’t help in the price discovery department.

Nickel’s most recent low was in February 2006 (do you mean 2016 ?); (NTD: there was one in last 5 years that got pretty close to the price of US$8000/t left 80& of the industry in a negative cash flow.

There has been a reduction in supply of over 200,000tpa (primarily Chinese NPI) in the last 3 years, and an increase in worldwide demand, driven by the EV narrative, has aided the nickel market in its recovery.

What does all this mean for you NOW?

If you have already settled on nickel as a potential investment opportunity, you likely have a bounty of good reasons, be that a projected 782,000t per annum increase in total nickel demand by 2030, or LME forecasts placing nickel’s spot price at US$17,000/lb (in constant terms) by 2024.

I think it’s very important for investors to not get caught up in that [Class 1 Vs Class 2] particular discussion.

The truth of the matter is that Class 1 and Class 2 nickel, as concepts, are mere distractions for investors, because laws of supply and demand and the Chinese ability to quickly respond to any market arbitrage opportunities,  will render the chemical differences fairly irrelevant in an investment context. Instead, total tonnage of nickel should be what investors are looking at today. The division of Class 1 and Class 2 simply doesn’t matter that much to investors anymore.

It’s important for investors to understand why and how Class 1 and Class 2 nickel have found themselves conglomerating into a singular quantity of nickel supply. In a recent interview with Crux Investor, nickel market commentator, Mark Selby, weighed in.

Class 1 & Class 2 Debate. Should It Matter To Investors?

Mining

There are two primary types of nickel deposits:

Nickel Sulphide

Expensive to mine, cheap to process.

Historically, mining nickel sulphide required underground mining in increasingly deep (and more expensive) mining operations . Nowadays, even deeper underground mines are utilised, with only a handful of open pit operations , but these are typically expensive to construct and operate. In 2018, 2 new projects were commissioned – Glencore began construction on their Onaping Deep operation which will cost $US[800] million and won’t fully ramp up until 2023

However, producers then make a concentrate from the sulphide ore,  upgrading the material from anywhere from 0.3-3% nickel to 10-15+% nickel for relatively little additional cost. This process is relatively uncomplicated and inexpensive; it needs to be smelted, refined, and then the process is complete.

Nickel Laterite

Cheap to mine, expensive to process.

Laterite projects are much easier to mine because the material itself is rock that has been converted to dirt over time, and as part of the process nickel and cobalt becomes concentrated in the soil. All mining companies have to do is dig up dirt and ship it off; this is a ubiquitous practice in Indonesia, amongst other regions.

However, this is where the simplicity ends. The processing of a material with complicated mineralogy requires significantly more time, technology and money. Costs include the large amount of electricity to melt the laterite to create NPI, or energy in the form of acid to break bonds, liberate the nickel/cobalt and create a US$1Bn+ HPAL process.

Reality

Individual nickel classes aren’t the main thing investors should be focussed on.

  • Companies can take intermediates of nickel sulphide and create a wide range of products, such as NPI and ferronickel (exemplified by the roasting process at RNC Minerals’ Dumont asset).
  • Nickel sulphide can also create finished nickel products via a smelter and refinery
  • EXACTLY the same can be said of nickel laterite. While the majority of it is currently used for NPI, there is no reason the material can’t be processed, refined and used for a wide range of alternative purposes. Specifically, laterite can be converted into finished nickel and cobalt products that can be used for the battery sector. Several companies are doing this right now, and as the industry evolves, we only expect to see this cycle grow.

Therefore, it is crucial for investors to avoid allocating too much focus to this debate. Chinese companies will likely build many facilities to process intermediates, while junior mining companies may also go down the same route, by having their own processing facilities on location to process products.

As we continue down the road of the EV revolution and the quantity of nickel in batteries increases, the specification for the sulphate will continue to become stricter. Therefore, building a processing plant to create sulphates appears to make little sense, because it would require continual improvements in order to keep up with progressively restrictive customer requirements.

Instead, it is likely companies will focus primarily on making high-quality intermediates, because the market will exist in the future for such materials as the nickel processing infrastructure continues to develop. This is further evidenced by the value of nickel sulphate premiums falling from c.US$2,000 two years ago to zero today. There are always lots of moving parts to different investment classes and commodities, but the message from industry insiders appears to be clear. Investors need to keep their eyes on the prize and view the market holistically the majority of the time. Reviewing things in microscopic detail may sometimes become more obstructive to gaining an overall view of a situation.

If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux Investor communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.

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