RPT-ROI-China built Indonesia's nickel boom but could yet bust it: Andy Home

Repeats earlier column with no changes to the text

By Andy Home

LONDON, Dec 1 (Reuters) - China financed and built Indonesia's nickel industry, transforming the country into the world's largest producer in the space of a decade.

But now China is not so sure it needs all that nickel. Chinese electric vehicle manufacturers are pivoting away from nickel-chemistry batteries.

Ever more of what Indonesia digs out of the ground is destined not for an EV battery plant but rather a London Metal Exchange warehouse.

Global exchange inventories of refined nickel have ballooned from 54,000 metric tons in January 2023 to 366,000 tons, equivalent to around 10% of global usage last year.

The weight of surplus has tamed nickel's wildness, which peaked with the suspension of LME trading in 2022. Prices have spent most of this year churning at rock-bottom levels.

Indonesia's nickel sector is still growing as the country pursues its ambition of becoming an EV powerhouse, but there is a very real risk it has bet too much on a battery metal that its biggest customer is growing cold on.

YOU WANT MORE NICKEL?

"Please mine more nickel," was Elon Musk's rallying call to the mining industry back in 2020. The head of Tesla TSLA.O was concerned there wouldn't be enough of the stuff to meet what was expected to be explosive demand growth from the EV battery sector.

Indonesia and its Chinese operators duly obliged.

The country's mined production surged from 780,000 tons in 2020 to 2.3 million tons in 2024. Its share of global supply rose from 30% to 70% over the same period.

The first wave of Chinese investment in Indonesia's giant nickel reserves was all about stainless steel, still the largest consuming sector for nickel.

Huge amounts of ore were shipped to China and then, when Indonesia banned the export of unprocessed ore in 2020, the trade shifted to nickel pig iron.

The second wave has been all about nickel as a battery metal. Spurred on by the Indonesian government to build downstream processing capacity, Indonesian operators now churn out a range of products such as matte, mixed hydroxide and even refined metal.

Most of the intermediates are sent to China for further processing into nickel sulphate, a form that is used in EV batteries.

BATTERY REVOLUTION

Well, that was the plan anyway.

The problem is that nickel has fallen out of favour with Chinese EV manufacturers, who are increasingly using batteries without any nickel or other high-price inputs such as cobalt.

Lithium-iron-phosphate (LFP) batteries have been around for a long time, but the consensus until recently was that they could never deliver enough power for anything other than small run-around city vehicles.

Chinese battery makers such as CATL 300750.SZ have shattered that myth, developing ever more powerful LFP products. The company recently unveiled its latest Shenxing Pro battery, which boasts a 758-km driving range and super-fast charging.

The LFP battery is cheaper and safer than other battery chemistries and has already grabbed a dominant share of the Chinese market, the world's largest. As Chinese EV makers ramp up exports, it is also taking a growing slice of the global market.

Battery demand for nickel is still rising, but largely because the global EV market is still expanding so fast. In terms of the amount of nickel deployed per newly sold vehicle, usage was up just 1% year-on-year in September, compared with 7% for lithium, according to consultancy Adamas Intelligence.

MARKETS OF LAST RESORT

The result of this shift in battery chemistry is Chinese processors switching from producing nickel sulphate to churning out refined metal that can be delivered to the market of last resort.

There was no Chinese-brand nickel in the LME storage system as recently as August 2023. The tally at the end of October was 173,000 tons, representing 70% of total warranted inventory.

Indonesian metal has also been shipped straight to LME warehouses, with 11,300 tons registered with the exchange last month.

It's not just the LME. Excess supply has been seeping into Shanghai Futures Exchange warehouses as well. Stocks of 40,782 tons are the highest they've been since 2018.

Rising inventory is keeping prices pinned to the production-cost floor, calculated at around $15,000 per ton by Macquarie Bank.

LME three-month metal CMNI3 has been struggling to hold even that level, with a November dip to $14,330 per ton, its lowest point since April.

BIG BET

The Indonesian government has shown signs of wanting to slow the breakneck expansion of its nickel sector.

But no-one's told its miners or processors, still mostly Chinese. Macquarie calculates that another million tons of high-pressure acid-leaching refinery capacity could ramp up by 2030.

Unless the brakes are applied more forcefully, the bank expects Indonesian overproduction to result in at least five more years of global oversupply.

The International Energy Agency agrees, projecting the market will only move into a supply deficit from 2030 onwards.

By which time, there could be a mountain of nickel sitting in LME warehouses.

Indonesia is gambling that demand will eventually catch up and absorb any inventory overhang. But it's ultimately a bet that nickel will remain a core battery input.

Even if it does, which is a big assumption given the rate of change in the battery industry, Indonesia's nickel buyers will be mainly European or American rather than Chinese.

Nickel chemistries are still dominant in Western EV markets and China's recent restrictions on LFP technology exports have given nickel an unexpected booster.

But Western buyers are likely to be much more fussy about environmental and carbon footprint than their Chinese peers, which is a problem for Indonesia's coal-powered nickel sector.

Indonesia's nickel resource nationalism has inspired many other mineral-rich countries wanting to keep a greater value-added share of their assets.

But Indonesia is now caught in a resource trap of a different kind, its fortunes inextricably tied to China and its waning appetite for nickel batteries.

Andy Home is a Reuters columnist. The opinions expressed are his own

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(Editing by Jan Harvey)

((andy.home@thomsonreuters.com, 44-207-542-4412 and on Twitter https://twitter.com/AndyHomeMetals))