A year after the London Metal Exchange suspended trading in nickel following adramatic price spike, the lithium ion battery industry has sought out alternative pricing mechanisms to better reflect the form of metal needed for electric vehicles.

Chinese producers of nickelare increasingly using Chinese renminbi prices linked to nickel sulphate prices for the large volumes of supply beingproduced by Indonesiafor the electric vehicle industry, according to Benchmark.

The shift has helped move pricing power away from the Hong Kong Exchanges and Clearing-owned LME to China, and also prompted greater volatility in LME prices, potentially putting western nickel producers at a disadvantage.

“There has been a significant loss in trust in the exchange which has made market participants cautious of using it, particularly in China,” Cameron Hughes, a Benchmark analyst said.

The limits of LME-approved nickel

Last March,prices for nickel soared by 250% over a daydue to a large short position held by the world’s largest stainless steel producer Tsingshan, who has large processing operations in Indonesia.

Part of the problem stemmed from the fact that only nickel which is an approved brand of the LME can be delivered into the exchange to be settled against its contracts.

This approved nickel is mostly Class 1 high-purity nickel produced by large western and Russian producers such as Vale, Glencore, BHP and Norilsk Nickel, a small portion of the market.

This does not cover thenickel coming from Indonesia, which is the form of nickel pig iron, ferronickel, nickel matte and mixed hydroxide precipitate (MHP), a common form of nickel feedstock used by the battery industry.

Indonesia is set to account for more than half of thetotal refined nickel marketby 2025, according to Benchmark.

“The exchange is not representative of the nickel market,” Hughes said.

Alternative pricing mechanisms emerge

MHP for the battery industry was typically priced as a payable to the LME nickel price.

But over the past year, some players are pricingMHP on the basis of the Chinese nickel sulphate price, minus the cost to convert MHP to sulphate.

Thebulk of nickel supply from Indonesiais converted to sulphate by Chinese companies. This makes it relatively straightforward for producers to shift to mechanisms based on Chinese prices rather than the LME.

The LME told Benchmark it “recognises the ongoing structural shift in the nickel market, driven by the dramatic growth in class 2 output.”

“We are committed to working with the industry to ensure that the LME’s offering meets the industry’s evolving pricing and risk management needs,” it said. “Our current focus is on rebuilding liquidity in our class 1 nickel contract and we continue to explore ways in which we might enhance the contract specifications, as well as how to best serve the needs of the expanding class 2 nickel market.”

The LME said it will start Asian trading hours again for the nickel market this month, in order to increase liquidity. It is also set to announce an “action plan” later this month on nickel, in response to an independent review carried out by Oliver Wyman in the wake of last March’s price spike, it said.

Premiums becoming discounts

Benchmark’s nickel sulphate price (on a contained nickel basis) traded at between a 20% and 46% premium to the LME’s nickel metal price in the year leading up to the nickel chaos.

In March 2022, this premium turned into a 3% discount following the short squeeze. Although the premium returned in May, it was significantly smaller than before at just 9%.

Low nickel demand in recent months has led to the prices once again shifting into a discount. In January this year, Benchmark’s nickel sulphate price was at an unprecedented 16% discount to the LME’s nickel price.

This has led to some nickel companies converting nickel sulphate into nickel metal to then sell into the exchange.

“The LME’s liquidity and stocks are far lower than usual, meaning it represents an even smaller share of the market than it did previous to the short squeeze,” according to Hughes. “This means the price can be moved by one to two trades and, since the LME trades futures as well as spot on one platform, it often doesn’t reflect the spot market.”

The lower the liquidity of the exchange, the more volatile the exchange price making it even less attractive to use as a benchmark price.

Western caution and Chinese dominance

But however much some Western players may distrust the LME, this is counterbalanced by their reluctance to move to Chinese pricing mechanisms leading to a dissatisfactory impasse.

“At the moment there still isn’t an alternative that can rival the LME,” Hughes said. “It’s more of a situation where a lot of the market is dissatisfied, but there still isn’t that kind of alternative that’s viable.”

However, some non-China-based mechanisms are starting to emerge. US commodity exchange CME plans to launch a nickel contract based on prices from Global Commodities Holdings (GCH), a UK-based online brokerage.

In addition, some Chinese operators in Indonesia are building refining capacity to start delivering into the LME, which may be a solution to the disconnect between the LME nickel and battery nickel markets.

Last month Huayou Cobalt met with the LME to discuss an application to register the company’s nickel for delivery on the exchange, Bloomberg News reported.

That would allow them to deliver metal into the LME, giving China “greater influence over nickel prices,” according to Greg Miller, an analyst at Benchmark. “It would allow the likes of Tsingshan and Huayou to effectively control the nickel price.”

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