Is Indonesian/Chinese nickel supply growth for the battery sector providing a procurement dilemma for western automakers?

Automotive companies are pursuing aggressive electric vehicle (EV) rollouts driven by regulations stemming from global net zero targets. Li-ion battery technologies used in EVs have evolved rapidly over the past decade as battery manufacturers have pushed for higher energy density. More recently, lithium-iron-phosphate (LFP) batteries have been quickly gaining market share to target low-cost, mass-market EV models. However, particularly in North America and Europe, luxury EV models will still feature Li-ion batteries with increasingly nickel-rich cathode chemistries (including NCA and NCM), which boosts energy density and thus the vehicle’s range on a single charge. Although nickel demand forecasts have been dampened by the rise of LFP-based EV batteries, nickel is still expected to see substantial growth for use in EV batteries over the coming decade, eating into the stainless steel sector’s dominance of the nickel market.

During the second half of the last decade, anticipated EV demand growth was set against fears that the availability of nickel intermediates, suitable for onward refining to nickel sulphate for use in cathode active materials, would be a major pinch point in the EV battery supply chain. Such concerns at the time were justified given that most nickel intermediates in the market have historically been tied up in long-standing, integrated supply chains producing high-purity Class I nickel products. There were indeed several operations that already produced mixed hydroxide precipitate (MHP) including Ramu in Papua New Guinea, Goro in New Caledonia and Ravensthorpe in Australia as a feedstock for nickel sulphate production. However, the volumes produced by these operations alone were not sufficient for the impending demand growth.

Along came Indonesia: the country’s nickel ore export ban in 2014 incentivised massive investment (mostly Chinese) in downstream nickel processing capacity geared towards the steel industry and it has rapidly become the world’s largest producer. Illustrating its meteoric rise, Indonesian refined nickel production has soared from as little as 23kt Ni in 2013 to 1.2Mt Ni in 2022 – a CAGR of 55%. Granted, this material has mostly been in the form of nickel pig iron (NPI) for use in Indonesia’s and China’s stainless steel sectors. However, some capacity has, in the past few years, been repurposed to produce nickel matte as a quick fix for intermediate tightness for the battery sector.

More significantly, Indonesia is now home to three operating HPAL (high-pressure acid leaching of laterite ores) plants producing MHP. This material is now being shipped to China for nickel sulphate production. What makes these HPAL installations unique is that, barring some pandemic-related delays, these were constructed relatively quickly and ramped up rapidly to nameplate capacity. This represented a watershed moment for the nickel industry and served to fully erase HPAL’s notorious reputation of earlier iterations of the technology that experienced challenging ramp-ups and CAPEX overruns.

These HPAL operations have now become a blueprint for identical installations. At the time of writing, Project Blue is tracking a further 12 HPAL projects under various stages of development in Indonesia (this total excludes multiple phases) based on the country’s abundant limonite resources. If all of these Indonesian HPALs were to be commissioned and ramp up successfully, supply would total a staggering 1.1Mt Ni-in-MHP by the end of the decade. Even under a scenario where 50% of this announced capacity enters production, Indonesian output of MHP would total over 500kt Ni – approximately a quarter of global nickel intermediate output. At first glance, the potential nickel intermediates bottleneck appears to have been removed. However, that masks the complexities that OEMs face when procuring nickel in 2023.

Despite the major role that Indonesia will play, there are significant limitations to the country’s rapid nickel development. These largely revolve around ESG concerns. Firstly, the task of safely disposing and storing vast volumes of caustic tailings following hydrometallurgical processing in a seismically active and high-rainfall region remains an omnipresent challenge. Earlier plans by the Indonesian HPAL projects to utilise deep sea tailings placement (DSTP) as a method of tailings disposal were scrapped – a compelling example of fierce stakeholder pressure over environmental concerns forcing a change in approach from operators. Secondly, the clearance of vast swathes of rainforest and the associated habitat loss for mining near-surface laterite ores. Finally, there is the high carbon intensity of processing nickel in Indonesia, given its power mix almost entirely reliant on coal.

Besides environmental concerns, the current geopolitical climate and partial decoupling of US-Sino relations is another complicating factor. The vast majority of Indonesian nickel capacity has come from Chinese investment and, as discussed previously, almost all of this is processed into battery materials in China. This has potential ramifications for the desirability of such nickel ending up in batteries in certain regions.

The US Inflation Reduction Act (IRA), signed into law in August 2022, has the objective of developing a low-carbon economy, which is intended to be achieved through grants, loans, rebates, incentives, and other investments. Of additional importance to the nickel supply chain, starting at the end of 2024, this requires the batteries that power vehicles qualifying for credits to not contain critical minerals that have been extracted, processed, or recycled by a foreign entity of concern. In the US, a foreign entity of concern includes, among other things, any foreign entity that is “owned by, controlled by, or subject to the jurisdiction or direction of a government of a foreign country that is a covered nation”. Covered nations identified by the USA include Russia, Iran, North Korea and most importantly, China.

The aforementioned ESG and political issues may prove unappetising to western automotive companies and their customers. Seemingly eager to source nickel that is unlikely to attract similar ESG supply chain scrutiny compared to Southeast Asian material, over recent years, companies have raced to lock in supply from elsewhere. In 2022 and early 2023, notable commitments included Vale’s deal with General Motors for 25ktpy Ni-in-sulphate from a proposed plant in Canada as well as Terrafame inking long-term deals with Renault, Umicore, and Stellantis for its nickel sulphate from Finland. However, hinting at the raw material requirements facing large OEMs who have previously championed the importance of sustainably produced nickel, Tesla is reported to have signed contracts worth around US$5Bn for nickel from Indonesian producers. It has also been in discussions with the Indonesian government over the potential to participate in the country’s growing battery industry.

Based on the above, there are signs that OEMs’ future nickel procurement decisions will not only be taken on traditional metrics including cost. Two distinct nickel supply chains may be emerging based on 1) Indo-Chinese material with less transparent ESG practices and 2) material originating from more ESG-focused jurisdictions. Even so, it is possible that the lengthy timeframes relating to the development of new sources of supply and the sheer scale of the raw materials required by OEMs’ ambitious EV rollout targets, may force many companies to relax key priorities of their nickel procurement strategies. 2023 will be another important year for future deals in the nickel market.