Tsingshan, nickel and batteries and the race for US subsidies

It was the summer of 2020 when Elon Musk implored “Please mine more nickel”, “Please mine more nickel”, Tesla, Musk continued, will sign you a gigantic contract for a long period of time if you extract nickel sustainably. To the sales managers of BHP, the world's largest mining company, it didn't seem true: the West Nickel mine would finally produce profits.

Step back. It's 2014, and BHP wants to sell its Nickel West unit in Western Australia, a fully integrated, mine-to-market business that includes mines, concentrators, smelters and refineries. It is estimated at up to $1 billion but the sale is suspended because it is believed that no one has offered a reasonable price, including Glencore. The costs of environmental recovery of the mine, estimated at at least 1 billion dollars, complicated the sale negotiations: 40 years of toxic waste must be carefully disposed of, burying it in some way or covering it with clay.

The following year, the 2000 workers at Nickel West were told to expect the plants to close by 2019. But in 2017, Andrew Mackenzie, CEO of BHP, sensed that Nickel West could return to profit, recharging with electric car batteries. The plant can convert the ore into a valuable form of nickel sulphate, particularly suitable for the production of lithium-ion batteries, which consistently fetches higher prices than nickel traded on the London Metal Exchange.

On 28 July 2021 BHP announces the signing of a nickel supply agreement with the most important “ecological” car manufacturer: Tesla. The story could end here, with the usual “and they lived together happily ever after”. But in all self-respecting fairy tales there is an evil witch who, in this case, is a magician, or rather an alchemist: her name is Xiang Guangda but she is also known as “Big Short”. Big Short is the owner of Tsingshan Holdings, (The Chinese “Apple” of the Mining Industry | the Astrolabe ( the Chinese mining and stainless steel heavyweight, and, it is rumored, a close person to President Xi Jinping.

Big Short is the creator of the storm (Short circuit nickel – Energia ( that broke out on the nickel market in March 2022, which led the London Metal Exchange to suspend trading on the metal after a jump in prices that it exceeded 100 thousand dollars per ton with an increase of 250% in two sessions. What plunged the market into chaos was Tsingshan's unscrupulous conduct and the weakness of the governance of the LME which, by wiping out 3.9 billion dollars of transactions, saved Tsingshan from bankruptcy and opened the door to legal disputes that have not yet been resolved. he concluded.

From the whole affair it emerges that the shadow of Beijing hovers over the oldest and largest market in the world for industrial metals, owned by Hong Kong Exchanges and Clearing Ltd., which, after undermining its credibility, the average daily volumes of nickel trading on the LME has collapsed, opening the door for the Shanghai Futures Exchange (ShFE) which is considering launching nickel futures for international use on its International Energy Exchange (INE) where commodities such as copper, crude oil and rubber are exchanged in yuan.

LME recently decided to accept nickel products of Indonesian origin into its warehouses, and most of Indonesia's low-cost nickel industries have a mixed Chinese and Indonesian shareholder base, indeed, the architect of the development of the industry Indonesian Nickel was our magician: Big Short. Indonesian-sourced nickel will flow into LME warehouses as Indonesia continues to build nickel metal production capacity. This choice will contribute to worsening the crisis of the Australian nickel industries: the Chinese Dragon's rivals in the electric car battery market.

The collapse in the price of nickel puts producers in crisis with high energy and labor costs while Indonesia continues to put pressure on the market: after just three years from the romance with Tesla BHP has declared that it will put its Nickel West operations in care and maintenance and that it will record a non-cash impairment charge of $2.5 billion that would reduce the book value of its Nickel West assets to minus $300 million.

The same fate is facing the Koniambo and Goro nickel mines in New Caledonia, a country that has some of the largest nickel reserves in the world. For Koniambo, Glencore has decided to stop financing while for Goro, the new ownership consortium, which includes Trafigura, has asked the French government for financial assistance. As the nickel market braces for further cuts and reductions, the Indonesian industry could account for around 60% of global nickel supply by 2025 and 75% by 2030, making Indonesian minerals key to battery production. Western electric vehicles

The obvious goal is access to the important US Inflation Reduction Act (IRA) tax credits. But most nickel operations in Indonesia have more than 25% Chinese ownership and therefore based on the US definition of Foreign Entity of Concern (FEOC) will not be eligible for tax credits available under the IRA: this is the vast majority of the more than 2 million tonnes per year of existing nickel capacity and the 1.4 million of tons per year of capacity under construction.

As it stands now Indonesian nickel will not be available to the US battery supply chain or at least not with the generous tax credits available under the IRA. But if nickel capacity from U.S. free trade partners is scaled back or comes at a particularly high cost premium, how will the U.S. auto industry react? Furthermore, although lithium iron phosphate (LFP) battery chemistry continues to erode the market share of NCM batteries, this is particularly true in China, while in the West, gigafactories predominantly use nickel in the electric vehicle industry.

Given the long-term demand expectations for nickel, we may be at the beginning of a period of mergers and acquisitions, where investors may seize opportunities to acquire new assets. Just like Big Short, which in Australia plans to build, with Australian Nickel Industries, a new type of conversion plant with an investment of 2.3 billion dollars capable of producing high purity nickel sulphate. It will supply battery chemicals to REPT, the Tsingshan battery manufacturing company, and other automakers – here's the path to US subsidies.