How to improve the Security of Nickel supply chain in China from the Perspective of "Nickel Futures event"

Since the new century, with the continuous breakthroughs of equipment and technology in the nickel industry and the rapid development of the new energy industry, the pattern of the global nickel industry has changed greatly. Chinese enterprises play a very important role in promoting the reform of the global nickel industry pattern, and at the same time, they have made outstanding contributions to the security of the global nickel supply chain. But in march, the price of Lunni futures soared by an unprecedented 248 per cent in two days, causing serious damage to brick-and-mortar companies, including china. For this reason, from the changes of the nickel industry pattern in recent years, combined with this "nickel futures incident", this paper gives some enlightenment on how to improve the security of China's nickel supply chain.

Changes in the pattern of global nickel industry

From the perspective of consumption scale, the scale of nickel consumption is expanding rapidly, and China is the main contributor to global nickel consumption. According to the statistics of the Nickel Branch of China Nonferrous Metals Industry Association, the global consumption of primary nickel reached 2.76 million tons in 2021, an increase of 15.9% over the same period last year and 1.5 times the consumption in 2001. Of these, China's raw nickel consumption reached 1.542 million tons in 2021, an increase of 14 per cent over the same period last year, 18 times that of 2001, and the share of global consumption rose from 4.5 per cent in 2001 to 56 per cent at present. It can be said that 90% of the increase in global nickel consumption since the new century comes from China.

From the perspective of consumption structure, the consumption of stainless steel is basically stable, and the proportion of nickel used in the battery field is increasing. In the past two years, the new energy sector has led the growth of global primary nickel consumption. According to statistics, in 2001, in China's nickel consumption structure, stainless steel nickel accounted for about 70%, electroplating nickel accounted for 15%, and battery nickel accounted for only 5%. By 2021, stainless steel will account for about 74 per cent of China's nickel consumption; nickel for batteries will rise to 15 per cent; and nickel for electroplating will fall to 5 per cent. In the future, as the new energy industry enters the fast lane, the demand for nickel will increase, and the proportion of batteries in the consumption structure will further increase.

From the perspective of raw material supply pattern, nickel raw material has changed from nickel sulphide ore to nickel laterite and nickel sulphide ore. In the past, nickel resources were mainly nickel sulphide ores with very concentrated global resources, while nickel sulphide resources were mainly concentrated in Australia, Canada, Russia, China and other countries, accounting for more than 50% of the total global nickel reserves at that time. Since the new century, with the application and promotion of laterite nickel ore-nickel iron technology in China, laterite nickel ores in Indonesia and the Philippines have been developed and applied on a large scale. In 2021, Indonesia will become the world's largest nickel producer, which is the result of the combination of Chinese technology, capital and Indonesian resources. The cooperation between China and Indonesia has made an important contribution to the prosperity and stability of the global nickel supply chain.

From the perspective of product structure, nickel products in the field of circulation are developing towards diversification. According to Nickel Branch statistics, in 2001, refined nickel played a major role in global primary nickel production, with a small portion of nickel iron and nickel salt; by 2021, refined nickel production accounted for 33% of global primary nickel production, while NPI (nickel-containing pig iron) accounted for 50% of nickel production, while traditional nickel iron and nickel salts accounted for 17%. It is expected that the proportion of refined nickel in global primary nickel production will decline further by 2025. In addition, according to the structure of native nickel products in China, about 63% of the products are NPI (containing nickel pig iron), about 25% of the products are refined nickel, and about 12% of the products are nickel salts.

From the perspective of the changes of the main body of the market, private enterprises have become the main force of the nickel supply chain in China and even the world. Statistics from the Nickel Industry Branch show that among the 677000 tons of domestic primary nickel production in 2021, the top five private enterprises, such as Shandong Xinhai, Qingshan Industry, Delong Nickel, Tangshan Kaiyuan, Suqian Xiangxiang and Guangxi Yinyi, accounted for 62.8% of the primary nickel output. Especially in the layout of overseas industries, private enterprises account for more than 75% of the enterprises with overseas investment, and a complete industrial chain of laterite nickel ore development-nickel iron-stainless steel production has been formed in Indonesia.

The impact of this "nickel futures incident" on the market and the problems exposed

First, the price of LME nickel futures rose violently from March 7 to 8, with a cumulative increase of 248% in two days, directly leading to the suspension of trading in the futures market LME and the continuous rise and fall of Shanghai nickel in the previous period. Futures prices not only lose the guiding significance of spot prices, but also form obstacles and difficulties for raw material procurement and hedging, but also disrupt the normal production and operation of upstream and downstream nickel, and cause serious harm to the global nickel and related entities and enterprises.

Second, from the external appearance, the "nickel futures event" is the result of the lack of awareness of enterprise risk control, the lack of awe of the financial futures market, the lack of risk management mechanism in the LME futures market and the superposition of geopolitical abrupt changes. However, from the perspective of internal causes, this incident exposed the problem that the current western futures market is far away from the production and consumption areas, which can no longer meet the needs of the real industry, and the breeding and development of nickel derivatives futures has not kept up with the development and changes of the industry. At present, developed economies such as the West are neither big consumers nor major producers of non-ferrous metals. Although the warehousing layout is spread all over the world, port warehouses and warehousing companies are mostly controlled by established European traders. At the same time, due to the lack of effective risk control means, entity enterprises have hidden dangers in the use of their futures tools. In addition, the cultivation and development of nickel derivatives futures has not kept up, which also increases the trading risk of nickel-related peripheral products enterprises in the implementation of product hedging.

Some revelations on improving the Security of Nickel supply chain in China

First, adhere to the bottom line thinking and grasp the initiative of risk prevention and control. The non-ferrous metal industry has the typical characteristics of marketization, internationalization and financialization. Therefore, enterprises in the industry should improve their awareness of risk prevention, establish bottom-line thinking, and improve the level of use of risk management tools. Entity enterprises should respect the market, be in awe of the market, and standardize their management. when they "go out," they should be fully familiar with the rules of the international market, make plans to deal with emergencies, and avoid being hunted and strangled by overseas speculative financial capital. Chinese-funded enterprises should learn from their experiences and lessons.

The second is to accelerate the internationalization of China's nickel futures and enhance China's commodity pricing power. The "Nickel Futures event" highlights the importance and urgency of promoting the internationalization of futures of related non-ferrous metal varieties, especially in accelerating the promotion of international boards of aluminum, nickel, zinc and other varieties. Under the top-level design, if the resource country adopts the market-oriented procurement and sales pricing model of "international platform, bonded delivery, net transaction, and RMB pricing", it can not only establish the image of China's firm market-oriented trade, and enhance China's commodity pricing ability. it can also reduce the hedging risk of overseas Chinese-funded enterprises. In addition, it is necessary to strengthen the research on the changes of the nickel industry pattern and pay close attention to the cultivation of nickel derivatives futures.

The third is to promote the establishment of a diversified strategic mineral resources reserve system. The fundamental situation of China's long-term improvement in the development of nickel and other new energy minerals and the import of large amounts of raw materials cannot be changed. Therefore, the construction of the national reserve system must be planned as a whole, and the government and backbone enterprises must explore the establishment of an overall reserve system that combines strategic reserves with commercial reserves, so as to effectively prevent and resolve all kinds of risks and challenges. further ensure the supply chain security of the whole industry chain.

Fourth, actively join international organizations and take the initiative to participate in global governance. In recent years, most of the new projects of global nickel investment are led by Chinese enterprises, and the implementation of overseas projects of Chinese enterprises has a direct impact on the stability of the global non-ferrous metals market. Compared with its share of the mining market, China plays a relatively weak role in relevant international organizations. If China has not yet joined the International Nickel Research Group (national member), it can only attend the meeting as an observer at the international conference. Therefore, it is suggested that the government should financially support industry associations to join international organizations, participate in global governance and have a Chinese voice.

Author: Duan Shaofu-Director of heavy Metals Department of China Nonferrous Metals Industry Association