OEMs should consider lithium stockpiling

Automakers will continue to get relief from less elevated battery metals input costs for the rest of this year, according to intelligence firm S&P Global Commodities. And next year could be an opportunity to splurge on meeting more than immediate needs, particularly on lithium, building up inventories in an oversupplied market ahead of tighter conditions in years to come.

S&P senior analyst Jason Sapoor predicts that “for the lithium market overall, we are expecting a combination of weaker demand growth and project starts to drive the market into a surplus" that will persist for the remainder of this year and into next. But OEM procurement teams should be aware these buyer-friendly conditions will not last long.

“Beyond that, we expect demand to outstrip supply, and this will result in a modest deficit in the market by 2027,” Sapoor warns. This is despite a bullish S&P view on the greater contribution that African lithium supply projects can make, even in the short term.

“Africa is emerging as a key player in the lithium market,” Sapoor says. “The continent has vast and relatively underdeveloped resources, and investments into the region are gathering pace.”

He highlights in particular the Arcadia project being developed in Zimbabwe by Australian miner Prospect Resources. Africa could become the third largest lithium producing region after Australia and South America by 2027, according to S&P’s forecast.

More time to buy nickel

Nickel’s supply-demand balance story is similar in the short term, in the consultancy’s view, but market tightening may not be as pronounced — a more bearish view on fundamentals compared to, say, competitor Benchmark Mineral Intelligence.

The metal has “come under significant pressure this year from bearish global nickel fundamentals, including the macro-economic outlook and US dollar strength”, Sapoor says.

The LME three-month nickel contract is down by 38pc so far this year, making it the worst performer of six base metals traded on the LME exchange over the period. But Sapoor cautions that, despite this, the contract is still trading c.$19,000/t, “which is a historically high level”.

In the short term, prices could come under additional pressure owing to LME appetite to expand the number of sources of nickel eligible for its contract — following an attempted short squeeze in the nickel market last year that saw trading suspended for a period — by cutting waiting times for approval. The exchange announced in July the approval of a new brand of Chinese-produced nickel, the first under its accelerated process.

But most recent data shows this newly sanctioned product has yet to enter LME warehouses. Its arrival, and further fast-tracked brands going forward, “will result in additional downward pressure on nickel prices”, in Sapoor’s view.

Nickel demand is, though, also set to strengthen. At present, the stainless steel sector accounts for c.70pc of global primary nickel demand, but S&P expects demand from the EV battery sector to be the main driver of global consumption going forward. “We are anticipating increased use of nickel-intensive cathode to maximise driving ranges, especially among premium vehicles, to combat range anxiety, allowing nickel demand from the passenger PV battery sector to rise rapidly in the medium term,” says Sapoor.

S&P sees global consumption rising at 4-4.4pc pa as battery sector demand accelerates. But the nickel market is also characterised by strong production growth, particularly in the world’s largest producing nation, Indonesia, and in China.

And this leads S&P to forecast a 105,000t surplus of supply in 2022 expanding to c.180,000t by the end of this year, the largest annual oversupply in 10 years. Average prices in 2023 are expected to be $22,0945/t, down from over $25,000/t in 2022.

“We are expecting the market to remain in surplus for the rest of our forecast period,” says Sapoor. "Again, my expectation is that primary nickel supply growth in Indonesia and China will offset growing battery demand. But, although the excess supply will put downward pressure on prices, we expect prices to remain elevated above historical averages.”

And he highlights that, as well as downside price risks like more Chinese supply being approved for LME warehouses, there are potentially bullish risks too — particularly around Indonesia changing its mining regulations and quota policies.