Nickel Supply Increase Causes Unexpected Market Disruption as 'Big Shot' Increases Production

The billionaire who was at the center of last year's nickel short squeeze is planning a major shift in his production mix. This could reshape global supply dynamics and inject fresh volatility into the nickel market.

Xiang Guangda's Tsingshan Holding Group Co. is looking to take advantage of the large premium in the price of refined nickel metal - the type that is deliverable on exchanges in London and Shanghai - over the intermediate forms that Tsingshan supplies for battery manufacturing, according to sources familiar with the matter.

Tsingshan is in discussions with several struggling Chinese copper plants about processing its material into refined nickel, said the people, who asked not to be identified discussing private information. If successful, Tsingshan's plan, together with similar moves by its peers, could double Chinese refined nickel production this year, from about 180,000 tons in 2022 — adding roughly a fifth to global refined output.

Xiang's move is in response to a growing divergence in the nickel market: total supply is headed for a years-long surplus, driven by a surge in production from Indonesia. Tsingshan and others are ramping up output of the intermediate forms like ferronickel and mixed hydroxide precipitate that now dominate the market. Xiang and other Chinese producers are also increasingly concerned about a weakening outlook for electric-vehicle demand in China.

Supplies of nickel metal have remained tight, helping to keep prices relatively high compared to the rest of the market.

The London Metal Exchange's nickel contract could see increased volatility in the wake of a reversal in recent trends. The LME has seen wild swings in prices in recent months, due in part to thin trading volumes and shortened hours. The exchange is still dealing with the fallout from a crisis that saw it suspend trading for a week and cancel billions of dollars' worth of trades. An independent review of the events is expected to be published this week.

The plan to use copper plants to process nickel is a novel one, but the process has already been applied successfully during a trial at a smaller factory in central China. Tsingshan is holding early talks with a number of copper producers, including Yanggu Xiangguang Copper Co., a major copper smelter that was idled once last year amid financial difficulties.

Tsingshan and Xiangguang did not respond to requests for comment.

Tsingshan has a long history of influencing the nickel market - even before last year's short squeeze that caused the LME to collapse. In the mid-2000s, it helped unlock Indonesia's vast nickel resources by developing a way to use its low-grade ore to make stainless steel cheaply. More recently, it has led a massive increase in production to supply the battery industry.

An increase in refined nickel production could help replenish global exchange inventories, which have hovered near multiyear lows, and help reduce the severity of squeezes in the future. This would come at a time when the biggest producer of refined nickel – Russia’s MMC Norilsk Nickel PJSC – is considering a 10% reduction in output this year.

Tsingshan's increased access to refined metal will help minimize the risks involved in trading on the LME, which it uses to hedge its output. In March, Tsingshan was the focus of a massive short squeeze on the LME, with prices soaring as much as 250% in two days when the Chinese company stopped being able to pay its margin calls. Tsingshan's position was complicated by the fact that, despite being the world's top nickel producer, it didn't produce any nickel metal that could be delivered on the LME.

The copper plants will only require a simple technical adjustment to be able to produce nickel metal from nickel sulphate through a hydrometallurgical process, and could be ready in a short period of time, according to sources.

According to industry sources, Tsingshan and its partner companies could increase refined nickel production from plants in China and Indonesia by 150,000 to 200,000 tons a year. This would represent a three-fold increase in total inventory currently held in warehouses of the London Metal Exchange (LME) and the Shanghai Futures Exchange. New nickel refineries are also under construction in China and Indonesia.