FEATURE: Increased supply, tepid EV sales to limit nickel sulfate prices in Q2

China's nickel sulfate prices experienced a slight uptick in the first quarter from peripheral nickel metal demand, although prices fell as demand dissipated. Market participants expect tepid demand to last through the next quarter with little signs of recovery seen from the electric vehicle sector.

Uptick in peripheral market demand

Nickel sulfate prices started 2023 at Yuan 37,600/mt ($5,393/mt), peaked slightly at the end of February to move into March at Yuan 40,000/mt, before falling back to the current level of Yuan 35,900/mt March 31.

The brief rebound was accrued to domestic China producers buying nickel sulfate to make electrodeposited nickel. While not typically used as a feedstock for nickel metal production, declining nickel sulfate prices and higher domestic metal prices allowed some processors to produce metal from sulfate with satisfactory margins.

Margins shrank, however, as domestic nickel prices fell, though sources have said this was a proof of concept in how producers could capitalize in future -- not too dissimilar to nickel pig iron producers switching to nickel matte production when the battery market is performing better than stainless steel.

Demand from the electric vehicle industry remained largely tepid in the first quarter.

Seeing that prices were bottoming out, part of the nickel sulfate demand came from consumers trying to lock in lower prices in advance, sources said.

On the sell side, raw material costs supported offer levels as payables for mixed hydroxide precipitate were relatively stable despite fluctuations in the LME nickel price, which some sources attributed to tighter spot supply in Q1.

China's EV sales rose 93% year on year to 6.89 million units in 2022, according to data from the China Association of Automobile Manufacturers. However, passenger plug-in EV sales dropped 55.8% on the month to 408,000 units in January.

This came after China's EV subsidies were terminated at the end of 2022 and sources are now skeptical about whether the country will achieve CAAM's forecast 9 million units in EV sales in 2023.

With current EV sales totaling 1.59 million units for January-March, there's a shortfall of 7.41 million units that averaged 820,000 units each month to meet the sales forecast.

The termination of EV subsidies may accelerate the shift away from nickel-manganese-cobalt (NMC) batteries to lithium iron phosphate (LFP) batteries, which directly affects demand for nickel sulfate -- a core ingredient in high nickel NMC batteries.

This was illustrated by the NMC battery share of Chinese EV battery production falling further to 30.6% in February from 33.7% in January, according to the China Automotive Power Battery Industry Innovation Alliance.

Raw materials supply pressure nickel prices

Looking ahead, market sources are expecting the bearish fundamentals to roll over into the second quarter.

S&P Global Commodity Insights' Metals and Mining Research team forecast that Indonesian primary nickel supply growth will cause the global primary nickel market to be in a surplus of 113,000 mt in 2022 to a surplus of 174,000 mt this year.

Several projects are expected to continue ramping up through 2023, including the Huafei Nickel-Cobalt project, PT QMB and PT ChengMach Nickel projects, which could further pressure nickel prices.

Recovery in the EV sector heading into Q2 remains uncertain amid steep discounts for internal combustion engine vehicles that would likely challenge demand for battery materials as a whole.

Macroeconomic headwinds could also contribute to volatility in nickel prices, with liquidity on the LME still thin since the historic short squeeze on March 8, 2022.

"Given the ongoing LME saga and Chinese buyers' desire to find alternatives to LME nickel prices to underpin transactions, we anticipate that such market participants will remain hesitant to resume trading on the exchange when the Asian nickel trading session returns [on March 27]," said S&P Global Metals and Mining Research Senior Analyst Jason Sappor.

The LME announced March 30 the implementation of a two-year program to "strengthen and enhance its markets". Of several key actions, the development of Class II contracts on its affiliate Qianhai Mercantile Exchange could boost the nickel sulfate market.

Tepid NMC demand plagues manganese sulfate

Manganese sulfate prices fluctuated within Yuan 5,500-6,000/mt through Q1 as demand from the EV and small power battery sectors remained tepid.

Platts assessed spot battery-grade manganese sulfate with minimum 32% manganese content at Yuan 5,800/mt ($844/mt) DDP China March 31, S&P Global data showed.

NMC precursor makers were operating at less than half their capacity due to lower order volumes in Q1, which has significantly suppressed demand for both nickel sulfate and manganese sulfate.

A handful of manganese sulfate refiners without export demand had reported utilization rates at 20%-30% of their usual production capacity, a China-based refiner source said.

Sources expect demand recovery in Q2 to be muted amid tepid demand from the EV sector, though the downside could be capped as current sulfate prices were nearing refiners' production costs.