BHP Group's supply deal with Tesla Inc. saw electric vehicle demand momentum building amid broader supply issues, which analysts say helped drive the London Metal Exchange nickel price to a five-month high on July 23.

LME nickel closed the week ending July 23 at $19,373 per tonne, its highest point since February, after Roskill noted on July 20 that the Koniambo ferronickel smelter in New Caledonia had not been able to restart the day before as planned.

Roskill said the smelter, designed for capacity of 50,000 tonnes per year, halted production on July 14 due to a two-week blockade by demonstrators "unhappy about new mine drilling and blasting contracts." The research group said the blockade would "exacerbate the currently tight nickel market."

This follows Vale SA also being forced to suspend its Goro nickel-cobalt operations in New Caledonia in November 2020 after protests from pro-independence activists in the French territory over selling its hydrometallurgical plant to Prony Resources.

In also observing nickel's sharp rise during the week, Westpac's July 26 note cited Vale saying July 20 that it is discontinuing its nickel production guidance for 2021 to 2023 due to "uncertainties concerning the timeline to resume production" of its Sudbury operation in Ontario.

Haywood Securities' July 23 note said LME nickel stocks have fallen 16.2% since April, while Shanghai Futures Exchange stocks are down 58% year-to-date. It credited nickel's rise during the week to "improving demand from stainless steel manufacturers and speculation that demand for EV batteries will continue to grow."

Haywood also cited Mining.com's EV Metal Index quadrupling year-on-year in May amid rallying nickel and lithium prices, with most of the demand coming from Europe where the European Commission unveiled plans in July to end registrations of combustion engine cars by 2035.

Positive bias

The Commonwealth Bank of Australia maintained its positive bias on nickel prices over the medium- to long-term in a July 6 forecast update to "reflect rising demand from the battery sector."

"Copper and battery-grade nickel supply already look challenged in coming years, especially if decarbonization gathers pace," the bank said, which "could see certain metal and mineral prices surge to incentivize new supply."

BHP's Chief Commercial Officer Vandita Pant said in a July 22 statement that "demand for nickel in batteries is estimated to grow by over 500% over the next decade, in large part to support the world's rising demand for electric vehicles."

Commonwealth Bank's mining and energy commodities researcher Vivek Dhar said in an email interview that such deals are "important in 'greening' the supply chain."

However, "with nickel demand linked to batteries [accounting for] only about 7% of total nickel consumptions, stainless steel (about 70% of nickel demand) will likely drive prices in the short term," Dhar added.

Benchmark Mineral Intelligence estimates that BHP's Tesla contract is worth up to 18,000 tonnes of nickel per year starting in 2022, from which point half of the carmaker's lithium-ion battery chemistry will be high nickel cathode, according to a July 22 note.

Tesla chair Robyn Denholm told an Australian Minerals Council event in June that the company could spend $1 billion on battery raw materials over the next few years from Australia, from where it already sources over a third of its nickel.

However, Dhar warned that Commonwealth Bank expects China's commodity-intensive economy will ease through the second half of 2021, underpinning its view of lower nickel prices by the fourth quarter.

"In fact, developments in the nickel supply chain likely offer more downside risks than upside risks for nickel prices," Dhar said in the interview.

Dhar cited Tsingshan Holding Group Co. Ltd.'s March announcement of a low-cost process to convert nickel pig iron to nickel matte — a product suitable for the battery market — which actually saw nickel prices fall sharply.

"We're not convinced if this technology will be adopted given its high level of emissions, but these breakthroughs are likely the ongoing risks to keep an eye on," Dhar said.