LME states position on low-carbon nickel premiums as calls grow for new pricing mechanisms

The number of calls for reforms to the London Metal Exchange (LME) nickel contract, and for separate pricing mechanisms for “green” or low-carbon nickel, have grown significantly in recent months, with Australian major miner BHP calling on the exchange to reform its definition of responsible sourcing.

These calls have come at a time when some nickel producers faced production cuts because of sustained low nickel prices. The prices have been under pressure largely from the increased production of nickel by Indonesia.

Added to this, there has been a steady influx of new brands being approved as LME-deliverable, with more awaiting such approval.

The LME introduced fast-track listing of new brands in March 2023 to rebuild liquidity in its nickel contract, which was languishing after an unprecedented price surge that led to the LME suspending its nickel contract in March 2022.

So far, the LME has approved 91,600 tonnes per year of capacity, with a further 80,000 tpy awaiting approval.

Total LME warehouse stocks for nickel globally were 73,944 tonnes on March 5.

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“[The introduction of fast-tracking brands] has not only helped to rebuild stocks of LME nickel but has assisted in driving price convergence between class 1 and class 2 nickel markets,” the LME said in its notice.

“The newly listed brands fully meet the LME’s brand specifications in respect of metallurgical quality, and the LME’s Responsible Sourcing Policy. Increasing the number of eligible brands has helped to rebuild confidence and liquidity in the LME nickel contract,” it added.

Although liquidity and volumes have increased, BHP has highlighted its concerns that many of these new brands rely on feedstock from Indonesia “where an increasingly well-known range of challenges to environmental, social and governance [ESG] [factors] and responsible sourcing currently exist.”

This view was shared by others in the market.

One producer highlighted to Fastmarkets its belief that there were “significant and meaningful differences in the market across suppliers and producers, and with consumers and credential requirements,” and that “more and more consumers impose robust demands, whether ESG, provenance or otherwise related, and this needs to be recognized because there is less and less a ‘one size fits all’ in the brands in terms of specification and form.”

Others did not believe, however, that there was currently any meaningful, widespread demand for low-carbon or green pricing for nickel.

“Ultimately, consumers are driven more by price than any other factor,” a second producer told Fastmarkets. “Price is king, as they say.”

Small market and lack of definitions pose challenges

One of the key challenges the LME has identified for launching separate low-carbon nickel products is the size of the market at the moment.

“The LME believes that the market for ‘green’ nickel is not yet large enough to support vibrant trading in a dedicated green futures contract,” the exchange said in the notice.

“Market participants have expressed concern that there remains significant market debate as to how to define ‘green,’ and further, that an LME contract representing a narrower sub-segment of the market would not attract sufficient stocks and trading volumes to be viable,” it added.

This lack of definition was arguably the most significant challenge facing the adoption of green pricing mechanisms for nickel.

In other markets, such as aluminium and steel, Fastmarkets has been able to identify specific levels of carbon in products and attribute increased value to them if they are at or below those levels.

The challenge for the nickel industry is to determine a similar level across its range of products and shapes, each having different supply and demand fundamentals.

“A global industry consensus currently does not exist on what constitutes ‘green’ nickel,” the LME said.

“Such a standard would need to consider carbon footprint, but also other sustainability criteria,” it added. “[These] include environmental management practices, respect of labor rights, water management, and wider business integrity and transparency considerations.”

While there are a number of independent bodies and standards in the industry relating to sustainable practices, the LME said that “comprehensive industry compliance with these certifications is still relatively [new] and the broad range of options means that it can be difficult to identify consensus regarding scope and metrics.”

Fastmarkets understood, however, that some standards and consensuses were emerging in the market over company practices, traceability and transparency, as well as carbon.

Low-carbon pricing mechanisms have already effectively emerged in other markets, including – as noted above – aluminium and steel. Fastmarkets has provided price transparency over differentials which can be achieved for products that fall under specific carbon levels, as highlighted in our methodology.

Although the LME has said that it was “currently not planning to change the brand specifications for the LME nickel contract, nor list a parallel LME contract,” it will work with its partner Metalshub to begin publishing a “report on a monthly basis [beginning March 31 this year] of data on the number of transactions and market value of class 1 nickel traded, including the subset with a registered carbon footprint lower than 20t of CO2 equivalent per tonne of output.

“This index could in time be extended to become a ‘green’ nickel premium index by considering additional sustainability characteristics,” the LME said.

For the time being, however, the LME has made its position clear in that it “believes that further industry consensus and agreed industry standards will be needed to provide the data necessary for consumers to be able to make fully informed purchasing decisions, and to support the emergence of truly green price premiums.”

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