Nickel’s dramatic rally is being fed by “hype” over electric vehicles and faces a challenge from new sources of supply in the coming years, traders and analysts have warned.

The price of nickel on the London Metal Exchange has risen by about 70 per cent since its low last March to $18,410 a tonne, as speculators bet it will benefit from rising sales of electric vehicles — which are increasingly using batteries with a higher nickel content. Forecasts of sharp EV growth, encouraged by policymakers’ push for a “green” recovery, have lifted a range of input metals in recent months, including copper and lithium.

“The rally has nothing to do with fundamentals,” said Andrew Mitchell, an analyst at Wood Mackenzie. “It is EV hype. If one looks at the supply/demand balance last year there was a significant surplus, and we expect surpluses this year and next.”

Just 8 per cent of refined nickel demand comes from batteries, while more than two-thirds comes from the stainless steel industry. But batteries’ share could reach 32 per cent by 2040, according to consultancy CRU. Such forecasts have fed the rally.

Line chart of $ per tonne showing Nickel rallies on EV hopes

“Sentiment has materially shifted,” Rob Crayfourd, portfolio manager at resources specialist NCIM. “A lot of the stimulus is green energy-focused so that’s why we’ve seen hype coming into the space.”

But Mr Crayfourd is also cautious on nickel’s future due to the amount of investment in new supply. He said he preferred copper for its wider use in wiring for a range of clean energy technologies, including wind turbines, as well as its looming supply shortage.

For nickel, new projects coming in Indonesia, Africa, Canada and the US are expected to cause a continuing surplus of the metal. The largest source is likely to come from Chinese-backed projects in Indonesia, which are planning to use a process called high-pressure acid leaching to separate nickel and cobalt to meet demand from the EV industry. One project, led by China’s Ningbo Lygend, is set to go into production this year. Another, led by China’s battery materials maker GEM Co, is scheduled to start production in 2022, depending on the Covid-19 situation.

Analysts at China’s GF Securities said they expected the projects to “reduce the cost of high-pressure, acid-leaching projects, bringing about a transformation in the use of nickel for batteries”. High-nickel batteries can store more energy and therefore provide greater EV driving range.

Talon Metals, a company developing a nickel mine in Minnesota along with Rio Tinto, is specifically targeting the EV market, and hopes to begin producing in 2025. And this week, a small UK miner Kabanga Nickel agreed with Tanzania’s government to develop the country’s Kabanga deposit.

There are risks to the supply outlook. Last year, protesters in New Caledonia, a French territory in the South Pacific, attacked a mine owned by Brazil’s Vale, after it agreed to sell the asset to a consortium including Swiss-based commodity trader Trafigura.

In October, New Caledonia voted to reject independence from France in a referendum, but there is growing anger against foreign mining companies. Further unrest could extend the closure of the Goro mine and affect others on the island. “All bets are off if this continues,” one nickel trader said. “The island is a tinderbox.”

A big question for the longer term is how fast EV demand can ramp up. Rachel Zhang, an analyst at Morgan Stanley, says a shortfall in supply of nickel for EVs could be “sizeable enough to influence nickel pricing in two-three years time”.

NCIM’s Mr Crayfourd thinks the growth in demand is “more long-dated than the market is implying”. He forecasts a surplus will hang around until 2024, or even 2025.