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Global consumption of nickel in 2017 was 2.2 million tonnes, of which two thirds was absorbed by the stainless-steel industry

Global stainless steel output rose by 5.8 percent last year and accelerated by another 9.5 percent in the first quarter of 2018, according to the International Stainless Steel Forum.

The International Nickel Study Group (INSG) estimates that global first-use nickel usage jumped by 7.8 percent last year and by another 9.7 percent in the first five months of this year.

This is good news for nickel, however, is that the market may be changing.

Historical price correlations between nickel and stainless steel have broken down, according to Russia’s Norilsk Nickel (“Nornickel”), the world’s largest producer. If nickel’s correlated to anything at the moment, they argue, it’s with cobalt.

Nickel and cobalt are two of the metals expected to benefit most from the electric vehicle (EV) revolution. Both are key inputs to most types of lithium-ion battery.

Analysts at Wood Mackenzie estimate some 40,000 tonnes of nickel went into EV battery manufacture in 2016,

There may be a bright electric future for nickel but Wood Mackenzie and just about everyone else thinks it will be a couple of years before the EV demand accelerator really kicks in.

Where’s all the nickel going?

LME inventory has fallen for eleven consecutive months. At a current 248,328 tonnes, stocks are at levels last seen in late 2013.

Stocks of nickel held by the Shanghai Futures Exchange (ShFE) are in danger of disappearing altogether.

Combined exchange stocks have fallen by 45 percent, or 233,000 tonnes, from their peak above 500,000 tonnes in early 2016.

The scale of decline has been greater than can easily be explained, even allowing for the stainless booster to nickel demand.

Nornickel’s view is that the battery supply chain is building pre-emptive stocks, a process that is being accentuated by traders and investors doing the same.

The reason the two exchanges are being hit so hard is that they both have the “right” type of nickel for making batteries.

Stainless steel mills can take nickel in all its multiple forms. Whether nickel pig iron, ferronickel or refined metal, it all gets melted in the stainless-making process.

Battery-makers, however, need nickel sulphate, a product that, for now at least, can only economically be made from Class I material, defined as having a nickel content greater than 99.9 percent.

Precisely the sort of nickel that is registered with the LME and the ShFE.

And precisely the sort of nickel that is in short supply.

Nornickel is forecasting global nickel output to rise by nine percent this year but most of the extra units will take the form of nickel pig iron (NPI), all of it destined for a stainless steel melt shop.

Production of Class I nickel, by contrast, is forecast to fall this year to the tune of 19,000 tonnes.

The divergent trends are directly related.

Breaking up is hard to do.

From this fundamental perspective, nickel’s bullish divergence from stainless steel is a reflection of the price incentive needed to stimulate more Class I production.

The projected growth in EV battery demand has electrified the nickel price, which in turn is sparking a revival in the production of the “right” sort of metal for conversion into sulphate.

So far, so good.

The problem and unintended consequence in a global context of escalating trade tensions impacting global growth, could be a retrenchment of the stainless steel industry that would affect global output of nickel.

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