The future of nickel:

A class act

Basic Materials November 2017

Authored by: The following outlook has been prepared based on our current understanding of the electric
Nicolò Campagnol vehicle industry, battery technologies and governmental regulations. Given the fast paced and
unpredictable nature of the electric vehicle revolution this outlook does not take into account major
Ken Hoffman
disruptions that could change the state of the electric vehicle industry. These disruptions include
Ajay Lala and are not limited to, new battery technologies that are not based on any current leading battery
Oliver Ramsbottom technologies, major shifts in governmental regulations and changes in consumer preference.
The future of nickel:
A class act
Executive summary
The global nickel market is entering a period of flux as two distinct commodity segments
emerge: nickel used in the fast-growing rechargeable battery market – in particular for
electric vehicles (EVs) – and nickel for the traditional stainless steel market, dominated by
ferronickel and nickel pig iron (NPI). This shift presents a set of opportunities and threats
that will require mining companies, battery manufacturers, and car OEMs to reevaluate
their strategies.

The global nickel market has traditionally been driven by stainless steel production using
both high-purity class 1 and lower-purity class 2 nickel products. Significant expansion
of low-cost class 2 nickel capacity over the past decade – in particular NPI – has caused
nickel prices to fall from the highs of USD 29,000 per metric ton in 2011 to an average of just
above USD 10,0001 per metric ton in 2017, resulting in the curtailment of higher-cost class 1
capacity. However, the growing adoption of EVs and the resulting demand for high-purity
nickel is providing a much-needed reprieve for the industry as a shift towards nickel-rich
battery chemistries accelerates.

Currently, class 1 nickel supply suitable for battery production represents approximately
half of global supply of 2.1 million metric tons (Mt) – although only 350 metric kilotons (Kt)
is available to be processed into powder and briquettes that could be used to produce
nickel sulphate (in 2017 approximately 65 Kt to 75 Kt of nickel content will be used to make
nickel sulphate). With annual EV production expected to reach 31 million vehicles by 2025,
demand for high-purity class 1 nickel may increase significantly from 33 Kt in 2017 to 570 Kt
in 2025. This comes on top of class 1 demand from traditional end-use segments i.e.,
plating, foundry and super-alloys. A shortfall in class 1 nickel production seems increasingly
likely as current low nickel prices do not support class 1 nickel capacity expansions and
alternative strategies e.g., shifting existing production from nickel cathode to nickel sulfate
or refining nickel intermediates, seem unlikely to provide long term solutions. As a result,
not only will nickel prices likely need to move towards incentive pricing but the future pricing
mechanism is likely to reflect two distinct nickel products: class 1 and class 2.

How rapidly a potential shortfall in class 1 nickel supply emerges will depend on several
factors, including the speed of EV adoption, the choice of battery technology, mining
companies’ willingness to restart class 1 production projects after a decade of low nickel
prices, the potential for technology breakthroughs in cost-competitive refining of non-
ferrous class 2 products and the potential for increased class 1 nickel recycling. Whatever
scenarios emerge, value chain participants need to weigh the strategic moves to enable
them to benefit from future nickel industry dynamics.

The following base case analysis is based on a set of assumptions regarding EV demand
growth and battery chemistries. Although we believe these assumptions to have a high
likelihood, how the industry actually evolves will be affected by government policies, battery
technology innovations, and industry economics.

1 Average from 1 January 2017 to 31 October 2017

The future of nickel: A class act 3

 Nickel: a market on the cusp of change
Historically, the global nickel industry has been driven by stainless steel production, which
has represented approximately 80 percent of annual nickel demand. Stainless steel
producers have traditionally used both high-purity class 1 products (defined as containing
99.8 percent nickel or above) in pure nickel metal form, and lower-purity class 2 products
(containing less than 99.8 percent nickel) as nickel alloys and chemicals in various forms,
such as nickel oxides and ferro-nickels. Over the past decade, class 2 nickel has greatly
increased its share of the total supply – from 25 percent in 2009 to nearly 50 percent in
2016. The key driver has been increased demand from Chinese stainless steel producers
seeking to reduce costs by using less expensive nickel units from NPI rather than traditional
class 1 nickel. This has, in turn, led to a strong supply-side response, with Indonesia – and
later the Philippines – dramatically expanding NPI production.

This shift to class 2 nickel has hurt mining companies producing the higher-purity class 1
nickel product as an increasing supply of lower-cost class 2 nickel caused nickel prices to
plummet from approximately USD 29,000 per metric ton in 2011 to just above USD 10,000
in 2017. As a result, producers of class 1 nickel have been forced to close mines and defer
capital expenditures.

However, the growing popularity of EVs represents a potential boon for struggling nickel
producers. Nickel is used in a number of battery applications, primarily in the form of nickel
sulfate. Of the 300 Kt to 350 Kt of nickel sulfate (65 Kt to 75 Kt nickel equivalent) produced
in 2017, approximately half will be used for the production of EV batteries.

The EV industry is seeing rapid growth, with annual production projected to expand from a
mere 3 million vehicles in 2017 to as many as 31 million by 2025. This bodes well for nickel
demand – and in particular class 1 nickel – because only class 1, with its high purity and
dissolvability, is suitable for battery manufacturing. As a result, the global nickel industry may
enter a period of change driven by a shift in end-use demand and the emergence of two
distinct markets: one focused on nickel used in rechargeable batteries, which is growing fast
as the adoption of EVs accelerates; the other used in traditional stainless steel, dominated
by ferronickel and NPI products.

The EV revolution
The growth in EV production is being driven by forces similar to those that have propelled
the rapid development of solar and wind power industries. Governments mandating a

4 The future of nickel: A class act

switch from conventional energy sources to renewables pushed companies to make
significant investments in developing these technologies, resulting in their growing
affordability. In time, these industries have managed to reduce their costs to below those
of the traditional energy alternatives. Likewise, government policies are now fostering
innovations in EV production that help lower costs. The introduction of emission limits,
such as fleet emission limits, combined with penalties for not meeting these limits, helped
to further focus the spend of OEMs on EVs. Additionally, EVs may gain an extra boost from
the sheer number of countries looking to impose deadlines for the transition to EV over
the next two decades – among them China, India, France, Germany, the UK, Norway, and
the Netherlands.

The impact is already apparent. Global production of cars powered solely by batteries
was less than 50,000 units in 2012; in 2017, it will reach almost 3 million. The base case of
McKinsey’s EV production model2 projects that by 2030, nearly 40 percent of new cars
sold in the US, EU, and China will be various forms of EVs, with battery-only electric cars
representing almost one in five of all vehicles sold globally. Under our aggressive case for
EV production, government regulations driving EV adoption, combined with technological
advances, could lead EV distribution to reach 52 percent of all new vehicle sales in 2030.

Ultimately, the extent and speed of EV adoption will be driven by a combination of

government regulations and targets, future battery costs (influenced by technology and

Exhibit 1: Growth in EVs from 2010 to 2025 split by hybrid and pure electric

Global light electric vehicle production

Vehicles produced per year from 2010 to 2025,
millions
BASE CASE
30.7
Hybrid electric vehicle
5.4 Plug-in hybrid electric vehicle
Battery electric vehicle

+30% p.a. 10.5

9.3

2.9 14.8 Currently, at least 13 countries –

including China, India and the US –
3.0 have passed regulations to encourage
1.9 the adoption of electric vehicles; the
~ 0.6 3.5 majority of regulations were passed
1.2 0.5
0.2 between 2016 and 2017.
2010 15 20 2025

SOURCE: McKinsey Center for Future Mobility

2 From McKinsey’s Automotive Practice

The future of nickel: A class act 5

 manufacturing advances driving production efficiencies), the development of necessary
charging and servicing infrastructure, the strategic positions adopted by leading automotive
manufacturers, and consumer preferences.

Regulations. One of the lessons from recent government efforts to foster renewable
energy production and usage is that mandatory changes, combined with incentives for
switching to renewables, will create sufficient demand to drive scale efficiencies. These
eventually deliver a cost advantage over traditional alternatives. A number of countries are
now trying the same approach in the EV industry by eliminating cars with emissions, placing
stricter emission restrictions on new models and subsidising the purchase of new EVs. For
example, the Netherlands plans to phase out the sales of all new fossil-fuel cars by 2035.
Already, EV owners are exempt from the typical registration fees and road taxes that drivers
of traditional cars face in that country. In the UK, the “plug-in car grant” covers 35 percent
of the cost of an EV up to GBP 4,500, and EVs are exempt from the annual circulation
ownership tax. The US has introduced tax credits for the purchase of new EVs, ranging
from USD 2,500 to USD 7,500 depending on the size of the vehicle and its battery capacity.
China, meanwhile, has passed legislation aiming to put 5 million EVs on the road by 2020.
The result of all these government moves is a race for the title of the first country to make
EV technology the national standard.

Battery costs. One significant inhibitor of EV adoption has been the cost of batteries. That
cost has begun to decrease dramatically in recent years. In 2010, the batteries used in EVs
cost approximately USD 1,000 per kilowatt hour (kWh) for the weighted average battery
pack; by 2016, this cost had dropped by 77 percent, to USD 227 per kWh. Today, some
best-in-class batteries cost less than USD 150 per kWh. At USD 100 per kWh, we believe
that batteries will reach the tipping point at which EVs will be cheaper than cars with internal
combustion engines. Our base case projects the average cost of a lithium-ion pack to be
USD 93 per kWh by 2030.

Several factors are behind this decrease in cost. The shift to large-scale, more efficient
facilities (such as Tesla’s Gigafactory) have driven production efficiencies, reducing the
average factory investments from USD 600 per kWh per annum only a few years ago to
USD  200 per kWh per year for the most recent investments. Similarly, new battery design
options are rapidly advancing companies’ abilities to optimize energy density, helping to
increase the vehicle drive range and thereby reduce cost per kilometer traveled.

EV infrastructure. Currently, infrastructure for EVs significantly lags behind what is available
for gasoline-powered cars. There are roughly 115,000 gas stations in the US, but only about
17,000 EV charging stations. Although electric cars can be charged at home stations, two
of the main reasons deterring customers from buying EVs are worries about running out of
power on the road and long charge times.

While some federal and municipal governments have pledged to build charging stations,
much of the current infrastructure investment comes from car companies. For example,
as part of its diesel emissions settlement, Volkswagen has committed to spending
USD 800 million on EV infrastructure over the next decade. Tesla is also taking aggressive
steps, with plans to build 7,200 rapid-charging stations round the world by the end of this

6 The future of nickel: A class act

year, while Porsche and Mercedes-Benz are collaborating to deploy ultra-fast 350kW EV
charging stations.

OEM strategies. According to a study by McKinsey’s Automotive Practice, 30 and

45 percent of vehicle buyers in the US and Germany, respectively, would consider an EV
purchase today. This compares to almost none who were willing to do so ten years ago.
Auto OEMs have responded to this rising interest by announcing plans for a combined
350 new EV models over the next several years. Volkswagen, for one, is aiming to leapfrog
industry leader Tesla by 2025 by redirecting its efforts from diesel cars to EVs. The company
is in the process of launching an EV series that it plans to sell around the world starting in
2020. BMW recently updated its EV plans with the addition of 12 all-electric cars, claiming
that some will have a range of more than 400 miles. General Motors is also expanding its
EV roster, with 20 new models under way in the next six years. The industry clearly believes
that, with the help of government incentives, the market is ready to embrace EVs.

This demand has emerged in no small part thanks to Tesla making EVs stylish and
sought-after: the company’s cars are fast, sleek, and travel distances on single charges.
But whether Tesla will be able to compete with the world’s largest auto OEMs as they
increasingly turn their attention to EVs remains unclear. Tesla’s Model X small SUV has a
base price of USD 91,500, and USD 136,200 fully loaded. Even factoring a US government
subsidy in the form of a USD 7,500 tax credit, the vehicle is significantly pricier than a
comparable luxury SUV, such as the Porsche Cayenne. While the operating cost of an
EV can be substantially lower than that of a gasoline-powered car, and maintenance is far
cheaper due to fewer moving parts, the cost differential is likely to remain a barrier for Tesla.
Having said this Tesla, is currently exploring other areas of electrification that may prove to
be profitable such as the Powerwall and the recently announced electrified semi-truck.

Consumer preferences. The vagaries of consumer preferences will also play an important
role in the speed of EV adoption. Public acceptance of the new technology will be affected
by everything from environmental concerns and car design to prices and the range of
EV models and features available for those models. According to McKinsey’s 2016 EV
Consumer Survey, the top two reasons consumers cite for not buying an EV are high price
and the driving range on a single charge. Increased battery densities have contributed to
considerable progress on the latter point, with average drive range increasing from 200 km
to as much as 400 km. For example, the previous generation of EVs, such as the original
Nissan Leaf and Hyundai Ioniq, had battery energies in the range of 28 kWh to 30 kWh.
This has increased in the latest generations, with the batteries in the new Nissan Leaf and
the Tesla Model 3 storing energies in the range of 60 kWh to 75 kWh. If manufacturers
can make similar strides in the cost of EV battery packs, the adoption of EVs should
accelerate significantly.

Battery technology options

There are five lithium-ion battery technologies vying to be the main choice for automotive
OEMs, each using a different blend of materials. Each type uses lithium as the charge carrier
between the anode and the cathode, with the majority having graphitic anodes but different
approaches to the cathode. These cathode chemistry archetypes are the basis for every
producer’s cathode “recipe.”

The future of nickel: A class act 7

Cobalt: supply The five main technologies are:
continues to tighten
While the growing shift from 1. L
ithium cobalt oxide (LCO). Used extensively in the portable electronics industry, this
the cobalt-rich NMC111
chemistry has good performance and is relatively safe. However, due to its high cobalt
to the NMC811 cathode
configuration is partly driven usage, it is expensive and therefore not suitable for EV applications.
by the higher energy density
of the 811, an even bigger
factor is limited cobalt supply. 2. Nickel manganese cobalt (NMC). This chemistry takes three main forms: NMC111
According to the United (the simplest, based on an equal amount of the three elements’ atoms), NMC622
States Geological Survey
(USGS), approximately 123 Kt
(with a higher energy density and lower price than NMC111 due to a lower cobalt
of cobalt was mined in 2016, content), and the most recent and advanced, NMC811 (with the highest theoretical
and the organization projects
performance). NMC chemistries were mainly developed for the EV industry but, with
insufficient supply to meet
demand in 2017. their high performance and relatively low cost, they may well end up being used in other
At present, approximately
battery applications.
30 percent of annual cobalt
use is in a variety of chemical 3. Lithium nickel cobalt aluminum (NCA). This chemistry was the first commercial attempt
applications, including
material used for EV batteries. to substitute nickel for some of the expensive cobalt in the LCO cathode. It has a good
This segment is expected to energy density and an affordable price, making it ideal for EVs and portable electronics.
increase rapidly, with demand
likely outstripping supply. The
result has been a rapid price 4. L
ithium iron phosphate (LFP). Intrinsically safer than other chemistries, LFP is not
increase, from USD 20,000
per metric ton in January 2016
protected by many intellectual property restrictions. Its high-power density makes it an
to over USD 60,000 per metric ideal candidate for electric tools and e-buses and a good option for EVs.
ton in September 2017.

Constraints in supply are likely 5. Lithium manganese oxide (LMO). It was used in the first EVs, such as the Nissan Leaf,
to persist. Approximately 60
percent of cobalt production
because of its high reliability and relatively low cost. LMO’s downside is low cell durability
comes from the Democratic compared to competing technologies.
Republic of the Congo, which
presents both operational and
reputational risks for mining
Market dynamics of competing technologies
companies. Additionally, Except for LCO, all of the above battery types are used in the automotive industry today.
cobalt is rarely found in high
concentrations and is mostly Chinese battery producers such as BYD have historically preferred LFP due to government
produced as a by-product regulations on the types of batteries that could be produced, but the relaxation of these
of copper and nickel.
Limited new investment in
rules is leading manufacturers to start shifting to NMC. Tesla uses NCA for its Model S, but
these two commodities has may deploy a high-performing NMC, such as 811, in the upcoming version (its Powerwall
only increased the supply home battery will use NMC). Other OEMs’ choices of cathode material vary by model, with
challenge for cobalt.
a tendency towards NMC chemistries in recent years. The overall share3 of each battery
Consequently, cobalt supply
constraints are likely to curb
chemistry in the EV market will be influenced by its energy density and the availability and
the growth of cobalt-rich price of raw materials – particularly cobalt (see “Cobalt: supply continues to tighten”). Nickel-
battery technologies, including rich chemistries have an advantage over cobalt-based ones both in terms of superior energy
NCA and NCM. For now,
manufacturers of these high- density, lighter weight for any given battery size, higher vehicle range, and lower metal cost.
capacity batteries are trying The last is of significance given that in 2016, roughly 24 percent of a battery pack’s costs
to reduce the proportion of
cobalt content by increasing came from the cathode4.
the amount of nickel sulfate
used. For example, the 622
battery (two parts cobalt
The cobalt supply shortage is also benefitting nickel-rich chemistries. Should this shortage
per six parts nickel), used in continue to grow, we expect EV battery producers to be hit harder than other cobalt users,
a number of European EV
battery applications, may
be replaced soon by an 811 3 For all uses, including consumer electronics, EVs, e-bikes, and grid storage
chemistry with only one part
4 This percentage will change based on the chemistry used and the cost of respective materials, as well as
cobalt per eight parts nickel.
battery size (larger batteries may use more metal to better hold the charge)

8 The future of nickel: A class act

such as manufacturers of super-alloys for aerospace and industrial cutting tools, due to
higher amounts of cobalt needed for EV batteries. This shortage would likely move the
market toward low-cobalt batteries. The high-performing, low-cobalt, high-nickel NMC811,
and even the cobalt-free LMOs and LFPs that have fallen out of favor due to their relatively
low performance, could see a resurgence. This shift is not certain as battery technologies
continue to rapidly evolve, but it is clear the chemistries that emerge dominant will be heavily
influenced by potential raw material constraints.

Exhibit 2: Battery technologies by chemistry

Key performance metrics of cathode chemistries Strong Moderate Weak

Cathode level metrics

Energy
Cost density Cycle life Ni content
Material Description Safety USD/kWh kWh/kg times kg/kWh

LCO Mostly used in consumer electronics.

(LiCoO2)
1,500 -
Limited application for xEVs Low Low 0.58 0
2,000
(e.g., Tesla)

NMC1 Used mainly in consumer electronics

(LiNixCoxMnxO2)
2,000 - 0.69
but increasing use in xEVs Mid Mid 0.60
3,000 (51 wt2%)

LMO Relatively mature technology. Used in

(LiMn2O4)
1,500 -
xEVs by Japanese OEMs (e.g., LEAF, High High 0.41 0
3,000
iMiEV, Volt)

LFP Relatively new technology used in xEVs

(LiFePO4 )
5,000 -
and ESS. Driven by A123 and Chinese Very high High 0.53 0
10,000
manufacturers (e.g., BYD, STL)

NCA Used mostly in consumer electronics

0.68
(LiNi0.8Co0.15 (often blended with other chemistries) Mid Mid 0.72 n/a
Al0.05O2) (49 wt2%)
and e-vehicles (e.g., Tesla)

1 For 811 configuration

2 By weight
SOURCE: Yoshio, M. et.al. 2009. Lithium-Ion Batteries: Science and Technologies. New York: Springer; McKinsey BMI battery materials demand model

Role of class 1 nickel in battery production. The process of making cathode materials
starts with metal salts (generally sulfates), which are mixed and oxidized. Like most
electrochemical devices, batteries require very pure raw materials. EV battery cathodes that
contain nickel rely on nickel sulfate in the chemical composition NiSO4∙6H2O. By weight,
nickel sulfate comprises approximately 22 percent nickel, and is produced when nickel is
dissolved in sulfuric acid in the presence of oxygen.

Theoretically, all class 1 nickel can be used to produce nickel sulfate, but the nickel used
is typically in the form of powder or briquettes to optimize the reaction time between the
nickel and the sulfuric acid. We estimate that today, approximately 350 Kt of nickel powder
and pellets is available for the manufacture of the 300 Kt to 350 Kt of nickel sulfate that
is required across all uses (or 65 Kt to 75 Kt nickel equivalent). Class 2 nickel could also
be used to make nickel sulfate, but the cost to purify and dissolve it is prohibitively high.
Although nonferrous class 2 nickel is a potential contender in the future, nickel sulfate
production for now depends on class 1 nickel.

The future of nickel: A class act 9

Stainless steel: Battery nickel demand. We expect battery production to grow from the current
ongoing shift away 120 gigawatt hours (GWh) per annum to 1580 GWh per annum by 2025. The major driver
from nickel-bearing of this growth will be the increasing production of EV (growing up to 30 percent per year
grades
between 2017 and 2025), but other sectors, such grid storage and e-bikes, will also see
In our base case, we between 5 and 15 percent CAGR over this period.
see global stainless steel
production increasing from
47 Mt to 54 Mt between For nickel-containing lithium-ion batteries, nickel content ranges between 0.3 and 0.7 g/Wh,
2017 and 2025. The resulting
growth in primary nickel
which translates into 15 kg to 30 kg of pure nickel for a medium-size, fully electric car
demand will be partially offset depending on the chemistry used (NMC111, NMC622, NMC811, or NCA). As a result of likely
by a continuing shift away cobalt supply shortages, we expect a shift toward the nickel-rich chemistries of NMC (811 in
from 300 series stainless
steel towards the non- particular) and NCA. Production of these chemistries is currently at 48 GWh per year, and we
nickel-bearing 400 series. expect it to grow to 990 GWh per year by 2025 – representing an increase in market share
Meanwhile, the 200 series
stainless steel market share
from 40 percent in 2017 to 63 percent by 2025.
has doubled due to high
nickel prices limiting the In this scenario, demand for nickel from the battery industry alone would reach 570 Kt
growth of the 300 series,
from about 10 percent in by 2025 – more than 10 times the current demand5 – and be exclusively focused on
2006 to roughly 20 percent in class 1 nickel. However, the availability of cobalt could significantly affect this estimate. If
2017 . We expect this pace
of growth in the 200 series
the cobalt supply remains severely constrained, nickel demand would fall to 250 Kt per
to remain constant through year as manufacturers would be forced to switch to cobalt-free batteries such as the LFP,
to 2025. The remainder of which does not contain any nickel. Without any cobalt constraints, demand for class 1
the primary nickel demand
will be offset by an increased nickel could exceed 800 Kt per year as manufacturers focus on high-performing, nickel-
recycling of scrap, growing rich chemistries while abandoning the lower-performing LFPs and LMOs. This scenario
from 0.9 Mt in 2017 to 1.2 Mt
by 2025
does not account for potential changes in the recycling and secondary uses of batteries
which may also provide an additional source for class 1 nickel units. Currently, the industry
Over the same period, we
estimate demand for nickel is focusing on recycling looking to extract the valuble battery raw materials at a low cost
from electroplating, super- while complying with the high regulatory standards for recycling. Secondary usage while a
alloys and other products
promising technical solution is being hampered by the high initial cost of the batteries.
outside stainless steel to
show a modest decline, from
520 Kt in 2017 to 510 Kt in Implications for the nickel market
2025 (an implied -0.3 percent
CAGR). However, the biggest In 2016, global nickel primary demand was estimated at two million metric tons (Mt). That
change will come from the demand is expected to increase to 2.5 Mt by 2025. Although stainless steel production is
soaring demand for nickel
likely to remain the largest end use for nickel, its share will decrease from 70 to 60 percent as
in batteries, which will grow
from about 33 Kt in 2017 to the EV revolution accelerates nickel demand for batteries.
over 570 Kt by 2025.

Between 2016 and 2025, we expect the respective segment demand for nickel to evolve as
follows: stainless steel demand for primary nickel will fall from 1.5 Mt to 1.4 Mt, non-stainless
steel demand will fall slightly from 520 Kt to 510 Kt ; and EV battery demand will grow from
33 Kt to 570 Kt. As noted above, only class 1 nickel is suitable for battery production; thus,
growth in overall nickel demand will be accompanied by a shift in the product class share:
between 2016 and 2025 class 1 will increase from 0.9 Mt to 1.5 Mt, and class 2 will remain
flat at 1.1 Mt.

However, the nickel industry faces a major challenge in the lack of an easy and suistainable
way to increase the supply of class 1 material suitable for battery applications. Under

5 Based on the 15 kg to 30 kg of nickel needed to produce an NCA or NMC cathode for a compact hatchback
battery EV (BEV)

10 The future of nickel: A class act

current market assumptions, the majority of nickel supply growth will come from class 2
sources (in particular NPI) increasing from 1 Mt to 1.2 Mt between 2016 and 2025. At the
same time, based on the current project pipeline class 1 mine capacity is expected to grow
only slightly, from 1.1 Mt to 1.2 Mt, as historically low nickel prices have led to mine closures
and the deferral of over 250 Kt of class 1 capacity. Nickel scrap recycling for stainless steel
production will also increase from 0.9 Mt to 1.2 Mt by 2025 (this material is not suitable
for batteries).

As a result, based on the current project pipeline, we project that class 1 supply will lag
demand by 2025, with only 1.2 Mt of supply available to meet 1.5 Mt of demand6. We also
believe there will be limited potential to increase class 1 supply for batteries by switching
nickel cathode refining to nickel sulfate refining, due to cannibalization of existing cathode
demand. This is despite the fact that some producers are expanding capacity for nickel
sulfate production. For example, BHP Billiton at Nickel West has approved a nickel sulfate
plant that will produce 100 Kt a year. While refining nickel intermediates may be possible, it
remains more costly than dissolving class 1 metal powders and briquettes.

Exhibit 3: Class 1 mined nickel supply demand balance

Supply demand growth for mined nickel between 2017 and 2025 BASE CASE
Million metric tons

Supply additions
2.47
2.08 0.25
0.14
1.24
Class 1 1.10
2025 Class 1 supply
demand balance
Class 2 0.98 1.23
Class 1 –
2017 Class 1 Class 2 2025 0.22 1.24 1.46 battery
supply supply Class 1 –
0.57 non-SS1
Demand growth Mine Class 1 –
Class 1 – 0.51
supply SS1
battery 2.02 2.51 0.38
Class 1 – 0.03 0.54 -0.01 -0.01 -0.03 0.57 Supply Demand
non-SS1
0.52 0.51
Class 1 –
SS1 0.39 0.38
Class 2 –
1.08 1.05
SS1

2017 Class 1 – Class 1 – Class 1 – Class 2 – 2025

demand battery non-SS1 SS1 SS1 demand

1 Stainless steel
SOURCE: McKinsey

On the assumption that nickel batteries will become the prevalent technology, the industry
will be presented with several options to meet the increased demand for class 1 nickel units,

6 Supply demand balance is based on the current market outlook and project announcements. It does not
account for any projects that could be incentivized by high prices in the future or demand shifts to lower content
nickel products

The future of nickel: A class act 11

 either to further substitute remaining class 1 nickel demand (380 Kt in 2025) away from
stainless steel production – although there is a technical limit as high grade 300 series
stainlesss steels requires class 1 nickel ; to see a continued shift away from nickel bearing
stainless steels or a reduction in austenitic ratios by increased 200 series usage; or to bring
new class 1 supply projects into production. Given the expected ongoing growth in the EV
market and hence growing demand for class 1 nickel the third option represents the most
sustainable long term solution.

Again, the industry will be presented with two options for expanding capacity, both with
potential drawbacks. The first is to use lower-quality laterite ores which have a relatively low
nickel content and a wide range of metal contaminants that will create complexity and an
increased cost in beneficiation to a class 1 product. For example, an African nickel project
is producing class 1 material from a complex laterite ore, albeit at a significant capital cost
of USD 90,000 per metric ton, in contrast to NPI expansions that are in the USD 20,000
per metric ton range. The second option is to bring on sulphide ores which also represent
a significant cost investment (a recent project in the United States and in Finland both had
a capital cost of between USD 30,000 and 40,000 per metric ton7) and are relatively rare.
The USGS reports that only 40% of currently available reserves are in sulfide deposits and
in addtion to that most of the sulfide deposits in well established mining regions have been
depleted necessitating additional exploration in new regions.

The need for additional class 1 capacity driven by EV battery demand will influence both
future nickel prices and the pricing mechanism. Currently, nickel is priced in relation to
the London Metal Exchange (LME) reference grade (98.8 percent or higher), to which a
premium or a discount is applied. For example, ferronickel not refined to an LME grade is
priced at a discount to LME. Class 1 nickel powder used to manufacture nickel sulfate, on
the other hand, has traded at a premium of up to 35 percent over the LME reference price,
driven by a combination of the additional processing cost and the demand for the higher-
grade product.

A shortage of class 1 nickel will likely see pricing revert to incentive pricing levels required
for the introduction of new capacity or the reopening of mothballed capacity. These
incentive pricing levels will need to be above current nickel prices and could increase
significantly if the supply-side response is slow. At the same time we expect to see two
distinct nickel price mechanisms emerge reflecting two distinct commodities: class 2
nickel, primarily for use in stainless steel production, trading at a lower price that reflects its
abundant supply; and class 1 nickel trading at LME prices – or above for high-end nickel
powders and pellets used to make nickel sulfates – reflecting required incentive prices.
Such a development would be a boon for class 1 suppliers, who require the higher prices
to finance new investments, and for stainless steel manufacturers purchasing class 2 nickel
but less advantageous to class 2 producers whose material will be priced in a market likely
oversupplied by 2025.

7 Total capital cost divided by nickel capacity and does not include capacity of other metal production

12 The future of nickel: A class act

 Exhibit 4: Evolution of nickel prices by product

Nickel prices for various products between 2000 and 2017 YTD LME 99.98% or purer cathode
USD/metric ton Nickel sulfate spot
Nickel briquettes
Global warehouse nickel stocks High-grade NPI
reduced to less than half day supply
60,000
55,000 Nickel prices driven by strong NPI becomes widely used by
50,000 stainless steel demand growth and Chinese stainless steel industry
financial investor activity
45,000 Prices collapse Philippines and
40,000 due to the GFC1 Indonesia ban
2008 - 09 nickel ore exports
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
2000 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 2018

▪ Pure nickel is traded on the LME with premiums/penalties for different nickel products
▪ Briquettes traded at premium vs NPI traded at a penalty to reflect its lower quality
▪ Nickel sulfate is based on the LME price adjusted for nickel content in the salt
1 Great Financial Crisis
SOURCE: Bloomberg Finance L.P.

Implications for industry players

The key determinants of the nickel industry’s future will be the extent and speed of EV
adoption, the battery technology that becomes the industry preference (NMC, NCA, or
a yet-to-be-invented solid-state battery using nickel as a material), and the supply-side
response to the changing demand picture. Additionally, these factors will evolve driven
by politcal consensus, implementation speed and infastructure requirements, requiring
players throughout the value chain to consider what strategic moves to take in light of
future industry dynamics.

Nickel miners are facing an important choice. Should they invest in a market that offers
future potential, but may not make them a profit at today’s prices? Or would they be better
off waiting for the EV sector to mature before investing in supplying its needs? Miners that
follow the first path face significant capital outlays. The cost of upgrading refining and
processing facilities to handle battery-ready class 1 soluble material can run into hundreds
of millions of dollars. The USD 43.2 million investment BHP’s Nickel West made to enable
its Western Australia facility to convert class 1 soluble nickel into nickel sulfate is an indicator
of how much capital the industry will need to allocate if it seriously pursues the EV battery
opportunity. One way to create a financial incentive for investing in new supplies of class 1
nickel-bearing material would be for miners to create a separate class 1 pricing structure.
By differentiating their pricing structure from the general class 2 and stainless steel scrap
nickel prices, class 1 producers would gain a price reflective of their own supply and
 demand dynamics. This would encourage new supply to be brought onto the market if
needed, as class 1 prices would be independent of the downward pull of the low-priced and
oversupplied class 2 market.

Battery manufacturers and automotive OEMs will need to develop sourcing strategies to
secure sufficient supplies of class 1 nickel to insulate themselves from the risk of shortages
and potential price spikes. Indeed lower price volatility, more predictable pricing and
less speculation in nickel by financial investors may make nickel more viable as a key raw
material for EV batteries. Partnerships between miners and battery manufactures are one
possible solution. BASF and Nornickel, for example, are already working together, with
Nornickel agreeing to supply the nickel needs of BASF’s future cathode-manufacturing
facilities. Volkswagen, meanwhile, has struck a long-term cobalt supply deal with Glencore
to ensure the supply of the other critical battery material. By devising creative, long-term
contracts that provide incentives for and share the cost of upgrading the material, both
sides may stand to benefit.

At the same time, miners, battery manufacturers, and auto OEMs will need to weigh up the
considerable risks of investing heavily in the class 1 soluble market for nickel-rich batteries.
While the energy density in nickel-rich chemistries certainly makes for a strong choice for
use in battery storage, other materials could come along to dislodge it from the battery-
making process. Battery technologies such as solid state batteries are seeing massive
interest from manufacturers and could completely change the outlook for nickel demand
if they become the dominant technology. It is unlikely that these technologies will mature
before 2030 however, they should still be tracked closely in case of any breakthrough. The
decision is a difficult one, with many interrelated factors and contingencies. But the high
stakes make it essential for industry players to weigh their options carefully before crafting
future strategies.

The authors wish to acknowledge the contributions of Sigurd Mareels, Jukka Maksimainen,
Wieland Gurlit, Avetik Chalabyan, Benedikt Zeumer, Richard Sellschop, Abhinav Tripathi,
and Anastasia Burkhanova to the development of this article.

14 The future of nickel: A class act

November 2017
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