Listen: Are the nickel and cobalt chemical markets shifting away from traditional pricing mechanisms?

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Scott Yarham

Welcome to the Platts Future Energy Podcast by S&P Global Commodity Insights. Today, we're going to be unpacking whether the nickel and cobalt chemical prices are shifting towards new pricing mechanisms. Both of these chemical markets have traditionally been determined by their respective finished metal prices. However, over the last 12 to 18 months, this has shifted away and seen a decoupling from such mechanisms and towards being priced independently.

But nickel and cobalt metal are not driven by battery metal demand. They are driven by stainless steel and the super alloy and aerospace sector, respectively. Therefore, both have been identified as problematic for those working with the chemical products, which is nearly entirely driven by electric vehicles and therefore, battery demand.

My name is Scott Yarham, and I lead the Global Battery Metals team. And today, I'm joined by two of my colleagues who are part of this team: Jesline Tang, Associate Editor based in Singapore; and Michael Greenfield, who's our Senior Pricing Specialist based in London.

Let me start with you, Jes. When we talk about nickel sulfates and nickel metal, how have we seen a decoupling in these markets recently?

Jesline Tang

Scott, so for nickel, in particular, as you mentioned earlier, acid battery markets continue to grow. Decoupling is definitely something that's being actively discussed in the industry. And from what we gather from the market especially, it seems that Chinese markets have perhaps gone a little further on the discussion, mostly because most of the battery demand has been concentrated in the region.

And additionally, as we observed in the past few years, we see more and more companies going into the extraction of nickel in Indonesia. So much of the new nickel resources that are coming out of Indonesia, they are actually in the form of nickel intermediates. So it is also not deliverable on the LME or the SHFE, which means that metal pricing will be quite tricky and a little problematic for the battery industry as a whole.

However, in terms of an actual decoupling, we see that ever since the short squeeze that happened in March on the LME, it seems that after the prices went back to normal, there are some participants who are still referring to the LME metal prices. As you see that one of the bigger issues is to be able to find an organization which can be agreed upon by both Chinese as well as ex-Chinese participants. But the discussion is definitely there.

Scott Yarham

That's really interesting, Jes. So the impasse of, let's say, calling nickel metal problematic to price nickel sulfate existed actually before the events involved in the -- on the LME. Since then, that perhaps maybe has been expedited. So are we actually seeing changes in price usage?

Jesline Tang

To answer this question, in terms of the nickel sulfate, actually in the Chinese market, we have heard that they do refer to other pricing mechanisms as well. But the most obvious shift away from the LME perhaps is actually in the case of nickel pig iron and ferronickel. So both of these are materials that are actually used in the steel industry as well. But because of the short squeeze on LME and also the increase in supply coming up in Indonesia, we did hear from Chinese participants that these intermediates are actually being priced on a fixed price basis. So this is actually completely delinked from the LME-type payable system.

Additionally, there's also a new form of intermediates that has been coming on to the market this year, which is nickel matte. So nickel matte came into focus when one of the largest nickel producers in China, which is Tsingshan, they announced plans to produce nickel matte as a intermediate for nickel sulfate. And as we see increasing volumes of nickel matte going into the Chinese market, we're also hearing changes in the payables for these intermediates. So for example, we did hear from some Chinese traders that nickel matte is actually being priced as a basis to nickel sulfate instead of nickel metal.

Scott Yarham

Interesting. Okay. So actually nickel sulfate being the basis and not actually nickel metal. So Jes, you've talked about obviously, the key risk, I guess, that the markets identified and obviously, those internal conversations and all that are happening right now, saying we have a battery metal here that's being driven by a stainless market that has nothing to do with EVs or battery demand. Can you unpack some of those key drivers and those reasons really, that are driving this change?

Jesline Tang

One of the main reasons, of course, would be the short squeeze happening on the LME. So many market sources actually reflected that, although there was a shortage of nickel metal, which resulted in the short squeeze, however, actually, the nickel market is actually well supplied in the form of intermediates. As mentioned earlier, including nickel matte as well as mixed hydroxide precipitates and also ferronickel and nickel pig iron.

However, all these intermediates, they are not deliverables on these exchanges. So as volumes for these intermediates grow and also demand for this growth in the nickel sulfate space, this will result in an increasing disconnect between the metal as well as the battery markets. So many of the producers and users and even traders that we speak to, who are in the battery space, they tell us that it doesn't really make sense to price this growing demand on a much smaller market, the metal market, which is sort of losing its share in the battery metal space as well.

In fact, actually, in the past, there have also been nickel metal being used in the battery metal space in the form of nickel briquettes. But due to the high prices of nickel metal previously, we hear that it's slowly being eliminated by the much cheaper intermediates coming on to the market.

Scott Yarham

I think that point that you made about batteries at the moment only constituting 5% of total nickel demand, of course, we understand it through our colleagues and the market intelligence that is growing substantially by the end of the decade, still being the minority when you think of stainless, but also alloy and coating on top really being the key drivers.

Jes, I'm interested to understand this a little bit further, if possible. As we know that the nickel-rich cathode and the nickel-rich chemistry is going to be the quickest growing parts of the EV market. That's where all the expectations are, primarily in regions such as Europe and also the U.S. given the high density and therefore, the longer driving range. I'm wondering, are these changes and this decoupling and I guess, reassessments of pricing mechanisms happening just in China? Or is this happening globally, too?

Jesline Tang

Actually, this is happening globally as well. So perhaps we will not see an immediate shift in the pricing system in the short term and many market sources that we've spoken to, they say that it's quite a traditionally-rooted system. So it could take some time to shift, but the inclination is definitely there.

So for European sources, producers or even consumers that we've spoken to, they've told us that there's definitely some wariness about using the metal contracts now, given what has happened. There's no guarantee on whether it would happen again. And even if it doesn't, it doesn't solve the fundamental issue that more and more of the demand for nickel will be in the form of intermediates, which, in some sense, is not related to the production for metal.

So I would say that's definitely an inclination. I think many sources out there, they are looking for new alternatives and also discussing new ways to price, not just nickel intermediates, also nickel sulfate.

Scott Yarham

No. Perfect, Jes. And that makes complete sense, given how much attention our daily nickel sulfate price is actually gathering for the reasons that you've -- that you just outlined. No, thank you.

I'm shifting, Mike, to you for cobalt and different sort of dynamics really, it's not like nickel that's primarily been by a massive beast such as stainless steel. However, there is some peculiar pricing mechanisms that are coming to the fore at the moment and being reassessed. As I mentioned in the introduction, cobalt metal playing a real predominant role in pricing that hydroxide. So are you two now starting to see a decoupling? What's the current state of play in the cobalt market?

Michael Greenfield

So in terms of market dynamics, we have about 74% of the cobalt supply coming out of the DRC in the form of hydroxide and around 72% of that refining capacity is in China for battery purposes. Now what the problem is, is that large amount of hydroxide supply is being priced based as metal, which, yes, there are some units going into the battery market, a decent amount. But a lot of that, as you said earlier, is still going in to stainless or to super alloy applications, which primarily is focused into the U.S. markets and also a little bit into the European markets.

So now that there's a disconnect with pricing between metal and hydroxide, the hydroxide pricing is significantly below the metal pricing. We're actually seeing people wanting to shift away from this hydroxide pricing system basis metal, because the hydroxide is effectively overpriced. That's causing multiple problems in the market. You have contract rollouts, people looking to QPs.

And of course, the concern within the market, is if this current situation continues, you can get people ripping up those hydroxide contracts. And there, of course, we're going to have a big disconnect in the market and people scrambling to actually secure their supply for the battery market.

And in terms of pricing dynamics, yes, we're looking for people to find a new solution, find a different solution that works better, where we're seeing hydroxide priced based as hydroxide and the metal market part of the market is therefore, no longer influencing that price. And that's where we're at, at the moment.

There seems to be in terms of nickel that those conversations are maybe a little bit further down the line, and they're looking for -- starting to get an idea of where those pricing mechanisms might change and where they might shift to, whether that's pig iron or basic sulfate. And the hydroxide market is still kind of finding its feet on that. We're not sure the exact direction to go, but definitely those conversations are starting.

Scott Yarham

So the cobalt hydroxide market, which is the intermediates to produce cobalt sulfates, that's now currently being priced off a metal with its own trading dynamics. How is that done? Can you give a little bit of a sense of what that word payable means?

Michael Greenfield

Yes. Absolutely. So the payable is a percentage indicator, which is currently published by a PRA. And the percentage indicator is then floating payable, whereby improved price collection through improved data collection methods, that payable is then judged to be a certain level. It was quite high until recently about 90%, and now it's dropped to around the mid-60s. So that's the current pricing mechanism, whereby the market understands how much to pay for their hydroxide, basis the metal price.

But as we've said, and as we've rightly identified and the market is questioning at the moment is whether that payables should be basis of metal or we should have its own independent hydroxide price for the market to therefore sell and consume the cobalt hydroxide, which is primarily going into the battery industry.

Scott Yarham

Thanks, Mike. So just to recap, so we have a metal price that's dictating the hydroxide price. And let's bear in mind that the metal price is the smallest part of the market, given the size of the hydroxide. So the smallest dictating the largest, which is then going into the sulfate. So potentially, you have a triple disconnect. If there's a disconnect between metal and hydroxide, you're going to have a disconnect between hydroxide and sulfates. Am I right in saying that?

Michael Greenfield

Absolutely correct there, Scott. And that's another step that we've seen in terms of the sulfate pricing has because we -- one second -- you're absolutely right, Scott. We've seen another disconnect further downstream between sulfate pricing, which is also quite low against this high metal price, which is influencing the cobalt hydroxide price.

So we have a real, as you say, disconnect between the supply chain of pricing, which isn't making sense, particularly for the downstream who can't price their battery products efficiently, correctly and accurately.

Scott Yarham

No. Perfect, Mike. Thank you. And just to be clear for intents and purposes, with our independent assessments of hydroxide, sulfate and metal, which we price for three, those are independent of each other, those are done on the markets' bids -- firm bids offers, transactions, et cetera, as per our methodology. They are actually not interlinked or done on any sort of payable indicator.

Mike, I'm interested to know, a very similar question that I asked Jes, obviously, we know China, which you quite correctly said right in the beginning, is the biggest refiner. Is this just a China story? Is this the feedback we're just receiving from China? Or is this really being really broadcast globally?

Michael Greenfield

Absolutely, as we said, that the Chinese is the biggest part of the consumption market, but you have consumers around the world. You have Japan and Korea, which are both big hubs. You also have a growing refining capacity into Europe as well. So the market is growing, the market is also growing into the U.S.

So while China dominates that story a little bit, and of course, a lot of the companies we're talking to are based in China, the growing part of the market will be coming elsewhere in the world and we'll see more of those and have seen more of those conversations develop with the companies coming online. So it will be an issue for the market globally.

Scott Yarham

Thanks very much, Mike. And as you mentioned, right at the top, the nickel-rich, which obviously cobalt is a key ingredient and we're talking about two of the main markets that are going into those cathode and those battery chemistries, which we expect have incredible growth in the U.S. and Europe. So how to these fundamental changes in pricing and pricing behaviors is a real step change in the market, so it's going to be fascinating to see how that develops.

Michael Greenfield

Yes. While cobalt pricing is an issue and we're seeing companies trying to reduce the amount of cobalt in batteries and moving to high nickel, so 9 parts nickel to 0.5 cobalt, 0.5 manganese, you still have cobalt in the battery. So there's only so much companies can do to reduce the amount of cobalt exposure to these potentially problematic pricing systems. But it's still going to be there and it's still going to be present in those high nickel-rich cathode chemistries.

Scott Yarham

Absolutely, Mike. That's a good point. So even though the limits of cobalt that's going into these batteries probably has been thrifted to a degree, as you say, with that exponential growth in EVs, that's going to need a great deal of cobalt. And therefore, the pricing mechanisms are going to be key in that.

Jesline Tang

So for the most part of the discussion, we've been talking quite a bit about the Chinese market, which is the main consumer for nickel, at least in the battery space. But outside of China, there are also battery makers who are expected to increase their nickel demand, for example, in Japan, in Korea, as newer nickel-rich chemistries become more mainstream in the market.

And from what we understand from the market outside of China, actually most of the discussion in the past has always been linked to the LME. So definitely, new pricing mechanisms, perhaps more focused on nickel sulfate would be something that is beneficial for these battery makers.

Scott Yarham

That's a very good point, Jes. And we've definitely received that feedback from the market of seeking an alternative to be able to hedge, but it's something that's based on a battery metal like nickel sulfate and not for the reasons that we've mentioned already on a market that's primarily driven by stainless. But really thank you both for all that insight.

Thank you very much for listening to this episode. If you'd like to keep in touch with our Battery Metals team, then please do reach out to us at battery_metals@spglobal.com. We could also add you to our weekly battery metals updates.