Entering March, a significant news in the nickel market has caused a "huge shock" in the market: Tsingshan Holding Group announced the progress of its high-grade nickel project in Indonesia and signed a supply agreement for high-grade nickel with Huayou Cobalt and Zhongwei Co., Ltd. The three parties agreed that Tsingshan will supply 60,000 tons of high-grade nickel to Huayou Cobalt and 40,000 tons to Zhongwei within one year starting from October 2021. After the announcement, Shanghai nickel prices fell continuously last week, barely holding above 120,000 yuan/ton.

The price difference between different nickel products is expected to return.

The main impact of this news lies in the supply-side changes brought about by the production process of high-grade nickel. According to Wang Yanqing, an analyst at CITIC Futures, in the traditional nickel industry chain, high-grade nickel is obtained through smelting sulfide nickel ore. However, the supply from this Indonesian high-grade nickel project means that ferronickel smelted from laterite ore has opened up channels for conversion into high-grade nickel.

"As the technology route for converting ferronickel into high-grade nickel matures, it can supplement raw materials for producing nickel sulfate and break the balance between two supply-demand industrial chains: laterite ore/sulfide ore - ferronickel/nickel plate - stainless steel and laterite ore/sulfide ore - intermediate products/nickel beans - nickel sulfate - precursors," said Du Fei, an analyst at Jinrui Futures.

In Gu Jing's view as an analyst at Yide Futures, the application of this technology brings two changes: first is an increase in total supply; second is that from an internal structure perspective, there is a competitive relationship between raw material supplies for ferronickel-stainless steel and high-grade nickel-nickel sulfate production chains.

From a supply pattern perspective, Wang Yanqing told reporters from Futures Daily that currently Indonesia's ferronickel production capacity is growing rapidly with supplies tending towards oversupply; ferronickel prices are significantly lower than pure nickel. Meanwhile, supplies of nickel for new energy applications are tightening; the demand for sulfuric acid required by batteries has created a significant premium over pure nickel. However, this news about Indonesian high-grade nickel supply has dampened expectations of shortages in new energy applications for nickel, causing the lines of Nickel-New Energy and Nickel-Stainless Steel to gradually converge; thus price differences between different types of nickels are expected to return.

Cao Yang from Dongzheng Derivatives Research Institute stated that successful industrial applications converting ferronickel into high-grade nickel mean that previously oversupplied ferronickel has found new applications in battery fields. For ferronickel, conversion will alleviate some oversupply pressure; but for high-grade nickel, conversion means breaking through short-term supply growth bottlenecks with huge potential for increased production. "In terms of timing, since it will take another six months from testing to industrial production and delivery before actual supply-demand impacts manifest more prominently in the second half of this year; however, its impact on market expectations or sentiment will be immediate," he said.

Expectations of tight market supplies may fall short.

It is understood that shortages of raw materials for producing sulfuric acid have been one of the main reasons supporting higher prices for nickel earlier on.

Du Fei stated that since Q4 2020 until now, driven by demand from electric vehicle power batteries, there has been explosive growth in demand along the chain from laterite/sulfide ores - intermediate products/nickel beans - sulfuric acid - precursors - power batteries; while refined nickels-sulfuric acid chain supplies have struggled to keep up short-term demands which became a major logic stimulating higher prices for nickels. Pure nickels (especially nickle beans) as one optional source for sulfuric acid have also seen their prices rise accordingly due to sulfuric acid demand.

"Previously before establishing a mature process chain connecting ferronickel-high grade-nickel-sulfuric acid processes; ferronickel prices were more influenced by stainless steel supply-demand dynamics. From this chain perspective, there was oversupply concerning ferronickels while there was tightness along the chain involving nickle beans/intermediate products/high grade-nickle-sulfuric acid. These two chains had relatively independent pricing structures; now with this connection established between them it means laterite ores-ferronickels can fully meet demands along ice-nickle-sulfuric acid chains," Du Fei noted adding that currently refined nickle pricing appears too elevated compared to ferronickle suggesting potential corrections ahead.

Gu Jing indicated that based on information released by Tsingshan Holding Group it can be seen their agreement with Huayou Cobalt and Zhongwei Co., Ltd starts supplying from October this year completing deliveries within one year which implies under conditions where consumption remains stable short-term shortages regarding raw materials needed for sulfuric acid won't be effectively alleviated yet. However long-term after Tsingshan's Indonesian project goes into operation if such technology sees widespread application across industries then inevitably price centers will shift downward.

Wang Yanqing believes application of such technology will cause prices to align closer towards those seen with ferronickle. However currently new energy's share within overall industry consumption remains limited thus not providing much upward pressure on pricing levels concerning ferromolybdenum costs remain evident already; finally current global economic recovery expectations remain strong continuing support towards higher pricing levels overall.

"In fact globally since last year there's been an overall state indicating surplus conditions regarding supplies while previous shortage expectations were only confined within new energy sectors hence such news may lead expectations around tightening supplies within new energy sectors falling flat instead shifting overall market anticipations towards comprehensive surplus scenarios," he added.

Market participants need to prepare accordingly.

"Du Fei mentioned future market contradictions would increasingly focus upon matching rhythms between supplies concerning ferromolybdenum-high grade-nickle-sulfuric acids against newly emerging demands surrounding sulfuric acids themselves given Tsingshan announced external supplies beginning October ahead earlier than anticipated timelines thus far leading potential downward inflection points regarding future pricing levels possibly arriving sooner than expected further pressuring downwards on pricing levels overall."

"Currently after consecutive trading days seeing limit-downs last week prices have retraced all gains made since December last year where both ferromolybdenum-electrolytic nicket pricing essentially hover around parity levels providing certain support against further declines while likelihoods surrounding continued sharp drops appear minimal maintaining probabilities around wide fluctuations instead," Gu Jing noted adding as shifts occur within anticipated dynamics surrounding both demand-supply mechanisms so too would market pricing mechanisms adjust accordingly suggesting investors should adopt cautious stances avoiding chasing shorts while producers face rapid declines losing opportunities protecting values meanwhile downstream enterprises could benefit enjoying advantages arising amidst these price drops stocking up appropriately during dips."

"Regarding future outlooks surrounding nicket pricing Wang Yanqing maintains views favoring 'short-term bullish long-term bearish' perspectives primarily due firstly large-scale availability post-October regarding High-Grade Nicket alongside current tightness still prevailing across broader sectors utilizing nicket secondly present price levels having dipped closely aligning near those observed alongside ferromolybdenum costs requiring substantial investments transitioning over towards High-Grade Nicket lastly ongoing robust anticipations surrounding global economic recoveries continuing bolstering supports behind nicket valuations."

In his view, support for nickel prices is gradually emerging, and investors should not be overly pessimistic in the short term. In addition, the stainless steel industry chain has not been significantly affected; instead, the drop in nickel prices presents a buying opportunity. For related companies, significant fluctuations in nickel prices are detrimental to stable operations, so it is essential to strengthen risk management and use futures tools for effective risk hedging to ensure long-term stability.

"In the short term, the market is reassessing supply and demand conditions and reconstructing the value of forward nickel, which is also mixed with a lot of emotional disturbances. But essentially, it is a matter of price returning to a specific stage of value," said Cao Yang. He believes that short-term nickel prices will not continue to plummet; rational investors will reassess the momentum of converting nickel pig iron into high-grade nickel after seeing the narrowing price gap between refined nickel and nickel pig iron.

From a mid-term perspective, he stated that nickel pricing will return to the value of nickel metal, which means balancing upstream mining with downstream terminal demand. In the short term, due to massive growth in demand requiring time and no obvious bottlenecks in mining supply, supply tends to loosen and pricing declines. However, from a longer-term perspective, he believes there is significant potential for demand growth and that bottlenecks in mining supply will gradually emerge, leading to a new balance.

Cao Yang suggests that investors can consider buying opportunities after significant declines in the short term. On one hand, there is currently no possibility for large-scale conversion of nickel pig iron before the fourth quarter; however, after a sharp drop in nickel prices, there will be more positive impacts on the supply-demand dynamics of refined nickel itself—such as limiting supply release and promoting downstream restocking. On the other hand, from a second-quarter perspective, both nickel salts and refined nickel remain relatively scarce in supply; thus, the spot market can still provide basic support in the short term. Additionally, for downstream companies needing raw material procurement, he recommends appropriately increasing stockpiles after significant drops in nickel prices; they can better manage risks using futures tools to avoid substantial price fluctuations.