➤ There is a global shortage of nickel sulfide concentrate, a high-grade product prized by battery-makers, that is masked by oversupply in the wider nickel market.

➤ The market must find a way to reward the credentials of sustainably produced nickel from favored, Inflation Reduction Act-compliant partners, given rapidly increasing demand.

➤ The London Metal Exchange has turned into a "dumping ground" for out-of-favor nickel that is distorting the market.

Wyloo CEO Luca Giacovazzi. Source: Wyloo Pty. Ltd.

Wyloo Pty. Ltd. is a wholly owned portfolio company of Australian private investment group Tattarang Pty. Ltd. Tattarang is owned by Andrew and Nicola Forrest, serving as a holding company for the Forrest family's private business interests. Tattarang also has a 35.15% interest in iron ore major Fortescue Ltd.

At the end of May, Wyloo put its Cassini and North Kambalda operations on care and maintenance in a bid to weather market oversupply caused by Indonesia flooding the market with cheap nickel.

Wyloo has been lobbying for sustainably produced nickel to be factored into pricing. And with certain types of nickel falling out of favor, CEO Luca Giacovazzi says the future in offtake contracting is uncertain for the London Metal Exchange (LME). The exchange approved the listing of the first Indonesian brand of refined nickel in May.

S&P Global Commodity Insights and Giacovazzi discussed how the nickel market is evolving considering recent key supply, demand and trade decisions and trends. The following conversation has been edited for clarity and brevity.

S&P Global Commodity Insights: Despite the downturn, some Australian nickel developers have managed to secure significant backing from major Japanese corporations this year. Does that suggest something else is actually going on beyond Indonesia's huge supply?

Luca Giacovazzi: Nickel demand in both the steel and battery markets is still growing at a tremendous rate. I think too much supply was brought on too quickly. The market got ahead of itself, and it's now oversupplied. But the demand side is still growing very rapidly, and it will just take some time for that to work its way through the system.

One of the interesting things at the moment is there's a part of the market that's saying, "We don't need to do anything because prices are low and we think it's going to be low for a sustained period of time." Then you've got other parts of the market that are saying, "This is actually an opportunity for us to lock in long-term supply."

So yes, you've seen a lot of the Japanese and South Korean companies do deals to secure nickel sulfide; and in our space in particular, one thing that doesn't get a lot of airtime is that there is actually a shortage of nickel sulfide concentrate globally. We get approached very often to talk about our concentrate offtake agreements.

Nickel is a funny market because it's so fragmented into so many different products. You might have one product that's putting the whole market down and one part of the market that's actually undersupplied. A lot of the big traders like Glencore PLC and Trafigura Group Pte. Ltd. are all trying to go long on concentrate because they know in the next couple of years, there's a shortage of sulfide concentrate. Over the last couple of years, you've seen concentrate payabilities really jump up because there is a desire from traders to lock in supply.

It's not really well understood, and the product that comes out of the smelters which nickel sulfides feed is also agnostic — it's not necessarily a battery product or a steel product, but is typically a very high-quality finished nickel product.

It's a challenge to get your hands on enough nickel sulfide concentrates to keep all the smelters around the world full long-term both in the west and China. You don't really see that in a lot of nickel commodity research by analysts focused at a high level — such as how many nickel units are in the market, what's the demand — and then they base their pricing on that. But if you go into each segment, there are unique dynamics in each part of the market, and in our part of the market, because we're in sulfide concentrates, there's a shortage.

BHP Group Ltd. suspending its Down Under nickel production has left Glencore and IGO as Australia's only remaining producers, according to S&P Global Market Intelligence data. Wyloo and partner IGO Ltd. also paused work on a planned integrated battery material facility in Western Australia. Is Australia's role in supplying sustainably produced nickel to battery supply chains in jeopardy?

Though we just put our mines in Australia on care and maintenance in May, our assets and others in Western Australia like IGO's Nova-Bollinger are very low-cost producers. So there is a misconception that Australia is very high cost. It's about being rational when the market has very low prices. Our mines also have a very small footprint. We don't produce at the mega scale of places like Indonesia. We're not doing 50,000 metric tons a year, but we're doing 15,000 very high-quality, very high-grade tons so we can produce it at low cost.

There aren't a lot of miners at the moment making cash flow to cover items like their financing costs. You have to remember, billions and billions of dollars have gone into building out nickel supply chains. That has all predominantly been funded by debt, so there's a cost of capital that has to be overcome. At the moment, the numbers that we run suggest there are a lot of producers out there that would be struggling.

So while we will continue to invest in exploration, on big capital projects like the sulfide plant, it makes sense for us to pause that for the time being while we see how the market plays out.

With reports of Indonesia wanting a limited free trade agreement with the US, you have been vocal about nickel pricing needing a "structural change" to distinguish between various products' sustainability credentials to ensure Australia's position as a supplier of low-carbon nickel under the US Inflation Reduction Act. Where does that leave the LME?

We talk a lot about the green premium on metals. Sometimes that gets abused as a term because people are saying when you're expecting a customer to pay more for a product, it's because it's produced in a better manner. But I do think the world has to at some point head down that path. We need to decide the standards we want to accept as a society, and that's going to be sustainable over time, otherwise no one will produce at that standard.

You can call it a green premium. You can call it an IRA-compliant premium. It doesn't really matter. The point of all these movements and discussions is that, where legislation is heading, the market will split at some point. You will have nickel, lithium and rare earths that meet the standard, and those metals that do not. There will be an expectation that metals are produced in a certain way — and that movement is gaining a lot of momentum.

Amid this movement, looking at the makeup of what the LME is comprised of at the moment, it has just become a dumping ground for Russian nickel and nickel that nobody wants. So its relevance for pricing is, for me, becoming less and less as something to peg our pricing against.

So how do you achieve pricing to reflect sustainably produced nickel?

It's either an alternative to the LME or you head down the path where it's a bilateral negotiation, which you see in the coal markets, for example. You've got car companies eager to lock up nickel supply, and those contracts look very different to a traditional LME model. You've got to appreciate how the LME operates. The LME is almost your place of last resort to sell to. So if you can't sell it to a customer, you put it on the LME and you bear the cost of warehousing it.

So all that nickel that's sitting on the LME, and all the inventories that are building up on the LME, are all of the things that people can't sell. And the sad reality of it is that then represents the rest of the market, and it pulls the whole market down. So when you're sitting there as a good business like ours, where you've got traders, car companies or chemical businesses all saying, "We would love to get our hands on your concentrate," and you say, "Well, I'm not going to reference myself off of a product that nobody else wants. My product is obviously something that people do want. Why should I reference myself off an LME price?"

That's where, for us, it's a big question mark with going forward as to whether we'll actually have a contract that's referenced off the LME nickel price again.