Unprecedented increases in nickel and oil prices may slow progress to net zero

After touching US$100,000 per tonne following a short squeeze, trading in nickel was suspended this morning by the London Metal Exchange. This comes at a time when oil and gas prices are also at almost unprecedented highs.

Nickel is a key component of cathodes for electric vehicle batteries as it allows for high energy density and high storage capacity. There have been extensive efforts in recent years to increase the concentration of nickel in such batteries in order to reduce the amount of other materials which are used in batteries, particularly cobalt. Cobalt had previously been much more costly than nickel and there were also ethical questions over the human and environmental impact of cobalt mining.

Given the importance of nickel in batteries, the amount of nickel being used every year will continue to increase and it will be important to make as efficient use of nickel as possible. Indeed, the IEA suggests that 60-70% of the total demand for nickel and cobalt will be required by clean energy technologies in order to meet the Paris Agreement goals, and that EVs and battery storage will be the largest consumer of nickel by 2040.

In order to support these goals, efficient use of nickel is vital and will run from efficient extraction and processing of nickel ore, through to the final commercial product making efficient use of the metal, and then to recycling. Efficient extraction is something which is often overlooked, but many billions of tonnes of metal ores need to be mined and processed to generate the refined metals needed in batteries and for the world to function. The high cost of nickel may spur interest in alternatives, but any such alternatives will take years of research before they become a reality.

Although the events of today are hopefully a blip, the long term increase in nickel usage and the difficulty in quickly ramping-up production, will act as a headwind to the adoption of electric vehicles. This may even spur large users of nickel to directly invest in exploration and in mines to ensure supplies of the metal, and countries may provide state support to benefit from tax revenues and the creation of skilled jobs associated with the extraction of raw materials that are both in extremely high demand and with long-term growth prospects. 

Furthermore, with oil prices so high, oil and gas exploration and production will continue, which could lead to an oversupply in future years, and make alternative fuels less cost-competitive. It should be remembered that oil fell from an all-time high of US$145 in 2008 to just over US$30 five months later. The cost to transition to net zero is going to be very high and companies generating oil and gas revenues will need to rely on such revenues in order to fund the research and development needed to transition to net zero, so oil and gas will continue to be vital and will serve to fund the transition.  

Companies are researching ways to produce hydrocarbon fuels from waste products, and sustainable aviation fuel is an exciting area of research with companies, such as Neste (amongst others), focusing very heavily on real-world solutions that are already being adopted by airlines, such as KLM (amongst others).

The high cost of specific materials demonstrates the need to provide a diverse range of solutions and options which lead to a greener future. By focusing or relying too much on any one particular solution or option, systemic risks are embedded.