Odd Lots - How Indonesia and China Cornered the Nickel Market

Episode Date: June 13, 2024

There's been a huge change in the market for nickel, which goes into everything from electric vehicles to steel. Indonesia has grown to absolutely dominate production and now provides more than 55% of the world's supply. A lot of that is going to China, which has partnered with Indonesia to help grow its nickel industry at a phenomenal rate. Now, there are accusations that low-grade and low-priced Indonesian nickel is flooding the global market, to the detriment of other producers. Western miners like BHP and Anglo American have been shuttering their own nickel operations, and have written them down by billions of dollars in recent years. On this episode, we speak with Michael Widmer, head of metals research at Bank of America, about the sea change that's taken place in the world's nickel market and what it says about the green energy transition, as well as the scramble for other strategically important metals. We also talk about all those bullish calls on copper, and general volatility in the metals space.See omnystudio.com/listener for privacy information.

On April 4th, 2023, around 2 in the morning, a man was found stabbed multiple times on a sidewalk in downtown San Francisco. Hey, who did this to you? What happened next turned the story into a political firestorm. Reports have identified the victim as Bob Lee, the founder of Cash App. From Bloomberg Podcasts, this is Foundering, the Killing of Bob Lee, beginning April 16. Hello and welcome to another episode of the All Thoughts podcast. I'm Tracy Allaway. And I'm Joe Wisenthall. Joe, I have a joke for you. A very special joke.

Go on. Why did Anglo-American write down its nickel business? Because it was only worth five cents. That's so good. That's actually, okay, my line was because it was a few cents short of a viable return. But yeah. Okay. Same thing. That's really good. Thank you. But you know what the thing is is my daughter has gotten really into reading me a joke. So, like, she has all these, like, joke books. Like, my brain is very...

You can anticipate them. Yeah, and, like, see where these all are going. All right. Well, on a serious note, Anglo-American rejected that bid from BHP Billetton, which is something that came up in our conversation with Jeff Curry recently. And as a result of that, it is now undertaking this formal process of selling off a bunch of assets and exploring options for its nickel operations. And one thing that I hadn't realized is just how much the nickel market has actually changed in recent years.

Like, I sort of heard some rumblings of it, but I read something recently that really crystallized a lot of what's been happening in that market. And it is phenomenal. I have to say, I have not given any thought about how much the nickel market has changed in part because I never at any point had some conception of what the nickel market was. in the first place. So you're way ahead of me on this. You're not thinking about the nickel market on a like at least weekly basis. No, I know like two, three things maybe about nickel, which is that a lot of it's from Indonesia, I believe. It has some role in batteries or green energy. And so it's kind of an important commodity. What's the third one? Oh, it's also Indonesia. Could Indonesia move further downstream in the process so that it's not just exporting the raw nickel, but also

exporting some of the actual, like, or doing some of the value at processing? That's a pretty sophisticated factoid about the nickel market. Those are the three facts I'm aware of about nickel. But beyond that, none. Like, I could definitely not tell you the number two producing nickel country. Okay, well, I have a bunch of... And I definitely don't know why nickel is important in batteries either. So maybe we'll learn that.

Oh, that's a good question. Well, I have a bunch of interesting stats that I think will sort of hit home stuff that has happened recently. But you mentioned the role of Indonesia in this market. And this is something that's relatively new. So I think they became the world's top supplier of nickel just in 2019. They overtook, I think it was the Philippines. And they now supply more than 55% of the world's nickel. So just insane dominance of that market. And in addition to that dominance in terms of market share, there's also lots of geopolitical intrigue with China. China, by the way, is about to become a net-refined nickel exporter. And I think, like, just a few years ago, it's imports, so not exports, it's imports accounted for like 14% of global supply. So it's gone from being like a net importer, potentially, to a net exporter in just a few years. Crazy. Right. So these are crazy stats. And I feel like we really need to dig into what has happened here because there are all these sort of thematic odd lots ideas embedded in the nickel market. So one is just the idea of structural long-term demand for battery-related materials that will be important in the clean energy transition. I think nickel is used in hydrogen production too. I'm not sure. But in addition to that, you also have the difficulty of actually building.

building out sustainable business models for getting these strategically important minerals that we need for the transition. And we've seen Indonesia, there are a lot of accusations that it's been flooding the market with cheap and low-grade nickel. And so that makes it harder for everyone else, like Anglo-American, to make money on this particular business. We'll get into that. We'll talk about all the different types of nickel. So anyway, I just think it's such an interesting story. And it's one that's sort of flown under the radar. at least for me recently. And so I am very pleased to say that we do, in fact, have the perfect guest to discuss this. We're going to be speaking with Michael Vidmer. He is the Bank of America

Head of Metals Research, and it was his report that really put this on my radar, and he just laid out some of the numbers that I cited to you a couple months ago, and I'm so glad we could get him on the show to further discuss this. So, Michael, thank you so much for coming on all thoughts. Thank you very much for having me. Should we start with the basic question that Joe already sort of alluded to? What is nickel? Because it's not a singular commodity in some respects. It's sort of like oil. There are all these different grades and production uses for it. So when we say nickel or the nickel market, what are we talking about? Yeah. So nickel is an element. I think that's the first thing I would say. It comes in elementary reform out of the earth. But what normally happens is that, consumers use a nickel in process form. So you have got the refined nickel that you can use, for instance, in your buckles, in your belt buckles to make them nice and shiny. You can then

use it or another form of nickel in the form. It's more like a chemical in EV batteries. And then there's still another type of nickel. It's more called nickel-pick-Arle or ferron nickel that you can then use in a stainless steel mill. So it comes in very different forms. What all of those have in common is they have some form of nickel in them. The batteries is probably the one, you know, belt buckles have been around for a while. Stainless steel has been around for a while. Obviously, a lot of interest, particularly now, strategically with the energy transition, et cetera, related to batteries.

What is the role of nickel in batteries and how crucial is it as one of the, you know, we talk about copper, we talk about lithium. How important is nickel? So we can break down the battery sector a little bit. Yeah, great. When you're looking at China and when you're looking at the world outside China, It's different type of EV batteries that car manufacturers can use. In China, the EV manufacturers have gone down the root of using what is called a lithium-irond phosphate battery.

It used to be a very simple chemistry, didn't have the same kind of energy density, didn't give you the same kind of driving ranges that you would get with other types of batteries. But it was cheap. And I think that's one reason why the Chinese EVs are not as expensive as the Western EVs. The West's world outside China has relied on a different type of EV battery chemistry, and these batteries contain nickel. They give you more energy density. They give you a higher driving range as well. And when you're then breaking down the battery, you have got three elements effectively.

So you have got an anode and a cathode, and between those, that's where the electricity flows. And it's the cathode specifically where you then have the nickel in them. So where does nickel actually come from? So we mentioned Indonesia already. I think I mentioned the Philippines. But who are the big players in this market? And how is it actually extracted from presumably the ground? Again, very different, very different methods of extracting the nickel.

Again, if you're breaking it down a little bit, you tend to have two types of deposits out there. The one deposit is more in the colder regions. And then you have got another set of deposits that's more in the warmer and wetter regions. there you have got a lot of oxidized ores and weathered ores are a little bit more difficult to treat. The former, so the nickel oars that are in the colder regions like Russia, for instance, are relatively easy to extract. You take them out of the ground, send them through a smelter, refine them, and boom, you have got your refined nickel. The nickel oars that are in the warmer and wetter regions because they're oxidized and weathered, they're a little bit more difficult to process.

So the different technologies that you can use. There's one technology, again, where you're, you're, you're a little bit more difficult to process. Again, where you're using fire refining, and then there's another technology where you are using sulfuric acid effectively to lead the nickel out of the out of the oars. When you're looking at the biggest players in the space, it has actually changed a lot, and you mentioned it already at the outset. Historically, when you're looking at it, you had Russia as a big nickel producer, Australia as a big nickel producer, the Philippines were in the fold as well, Canada, to some extent, too. But what's happened recently is as the energy transition started to take off, market participants were really focused on increasing nickel supply quickly. And there's one country that just jumped at the industry. And that country is Indonesia.

It has the weather type of ore, but it has that in abundance. So it's very easy to actually take it out of the ground. And the Chinese went into Indonesia. were very innovative also in the production technologies and managed to take the nickel out that they then needed to drive the EV battery industry. So I definitely want to get into Indonesia and what they've done to sort of rapidly expand

their domestic nickel industry so fast. But just one more question before we get to some of these policy questions and supply. When looking at a total demand, global demand for nickel, how much is batteries and how much has, the rise of the so-called energy transition, how much has that changed demand curves relative to say where we were 10 years ago? Like, how important is it as a buyer of nickel now? Oh, massively has changed massively. 10 years ago, the battery sector had virtually no share

in nickel demand. When you're looking at it now, virtually all of the demand grows. And like, how many tons of nickel do we produce and how many tons would we be producing every year if it weren't for that battery demand. So look, a few years back, the nickel market was around 2 million tons. By 2030, it's potentially twice as much. And virtually all of the demand rolls is then coming through from the EV battery side. I'm June Grosso, inviting you to join me for the Bloomberg Law podcast. Every weekday, we help you make sense of the legal stories that shape the nation and the world.

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Okay, so going back to Indonesia, so it seems like they made a strategic decision that this was an industry that they wanted to build out. And I think it started under the former president of Indonesia, whose name I am sure I'm going to mispronounce, but Susilo Bambung Udoin. Is that right? Yes. Okay. But it's been continued under Joko Widodo. Why did they decide this was an area of strategic or financial interest? So it was the Indonesians which opened up the country, but ultimately it was actually China, which drove that development. And I think you see that a lot in the public discussion at the

moment. I think the tariffs that President Biden, for instance, imposed on Chinese EVs, I think there is this undercurrent or the concern that the Chinese government very strategically, over the past 20 years, built its EV industry. And when we are talking to EV industry, it's not just the EV side of things that the Chinese government has focused on. It's literally the entire supply chain. So they looked at initially, well, let's build some cars as a combustion engine. But then the China realized, it's actually hard because the US and Europe actually have quite strong industries. And then they looked well, if it's hard to compete in cars with a combustion engine, why don't we do EVs? And that's exactly what they did. And then they set up a long-term strategic

industry policy and looked at what they need to accomplish becoming the dominant producer of EVs. And one of the things that the Chinese government realized very early on is if you have a strong demand growth for EVs, you also need the raw materials. And particularly the battery raw materials. Without batteries, the EVs don't go very far. And so the Chinese government looked at where some of those battery raw materials are. They did it in lithium, another battery raw material. They did it in cobalt and they did also in nickel.

And in 2013, the two presidents of China and Indonesia effectively set together. And the discussion pretty much went like that. The Chinese said, look, we need the nickel. The Indonesian said, well, we have the nickel. And the Chinese said, well, can we invest? And the decision said, yeah, do, come. Let's develop that industry together. And so the Indonesian government then together with the Chinese set up industrial parks

and through that industrial park supported by Chinese money, the nickel industry then developed very, very quickly. It's remarkable the pace with which Indonesia and China in conjunction have been building that industry. Let's talk a little bit about how fast that happened. So I think, Tracy, did you say it was like 2019 even? Indonesia wasn't that big of a player? I'm citing Michael here, but in 2019, it became the biggest producer of nickel. And now it's overwhelmingly the answer.

What were the nature of those early relationships? What did China get? What did they have to offer from a technological transfer? And then what is Indonesia get, I guess, in terms of royalties and jobs? Like, what was the economics of those? So what Indonesia realized? Indonesia always was an exporter of. nickel ores, which is unprocessed stuff.

You basically put it on a ship, send it off to China, the Chinese then processed it. And then the Indonesian government realized at some stage that it's actually not a lot of value added in that. And they also saw that demand potentially increases very strongly. And so they wanted to build more of a value-added downstream industry. Indonesia wanted to build a downstream processing industry invited and then was looking at how to actually accomplish that. So in the first instance, what they did is they stopped the exports of unprocessed nickel ores.

So in 2014, you could no longer ship unprocessed ores. In that year, Indonesia had a global nickel market share of less than 10%, like 5% or 6%. Very low. And then I think various countries and operators were looking at the Indonesian ores. And I said before, the Indonesian ores are weathered ores, oxidized ores, very difficult to process. And the Chinese then went into Indonesia. It's one company in particular who then looked at innovative production technologies and started experimenting with different methods of extracting the nickel from the nickel oars.

And we're actually quite successful. And once they had this template in place, the nickel industry then expanded quite quickly. Has anyone else been able to replicate what that Chinese processing technology that you just mentioned? Like, is this something that other people are doing that has also increased supply elsewhere in the world, aside from Indonesia, or is it sort of a China-Indonesia exclusive thing? So there's two technologies, one called pressure as a leaching that has been tried before, but literally when you're looking at all the projects that have been brought online in Australia over the lifetime of those projects, those projects will not pay for the initial investment

because it's just a very difficult technology. The Chinese have been very good in bringing that online. The other technology, which is more parametology, which is fire smelting and refining, that is also dominated by the Chinese. So they already had a very strong. Wait, just to be clear, Australia has basically tried to do the exact same thing and internally have not been able to do it economically. Yeah, so there was a discussion. It was about 10, 15 years ago on the type of ores that are available in Indonesia. And I think the undertone always was, look, the oars are there, but they're just very difficult to approach. and therefore it might be hard to see a very big production increases coming through.

And that was through up to the point where the Chinese actually then went into Indonesia and started developing those assets. So talk to us more about the sort of virtuous cycle of the supply chain that this is creating. So China now has access to this cheap and abundant nickel that feeds into their EV industry. How crucial has that nickel been in sort of? sort of building out the electric car business in China? I think nickel on its own probably wouldn't have made much of a difference, but I think where China was very strategic in making sure that all of the raw materials that are needed are available.

So it's not just the nickel side. It is the lithium side as well. It is the cobalt side as well. That's everything that goes into the cathodes. And when you're looking at the unnotes, the graphite side of things, again, China is dominating. So when you're looking at all of those critical raw materials, a lot of that is being dominated by China. And look, you can take a slightly different view on that.

Take the last 20 years during the period of globalization. I bet around 2010, 2011, the guests that you would have had here, there was a lot of talk about, I don't know, Netflix, the services industry and the cool stuff, basically. Now, this is the cool stuff. But no one realized that actually you can't run an economy without having the basic raw materials. So the West effectively created a vacuum in those supply chains that China effectively filled.

And that's the issue that governments now have to grapple with. How much of the Chinese edge when it comes to refining or processing or I guess even acquiring raw commodities, how much of the edge is just a sheer scale question? There is a gigantic market in China, period. There are a lot of workers in China, period. And so setting, even setting aside whether different groups of engineers and scientists could replicate these processes on paper, how much is just the pure scale edge part of the story here? I mean, having a big domestic market certainly helps.

But again, what also helps is having a strategic industrial policy to actually being able to capitalize on that domestic market. And it's, I think, the conjunction of those two that brought about. that dominance in the supply chain. Now, the problem that we're having increasingly is, and this always happens in China, we had it in steel and we had it in aluminum. When the Chinese government starts developing industries, there's actually inherently a lot of competition

also within China. But you always get over-investment. You have got over-capacity. So take the last study from the European Union, for instance. The European Union estimates that last year the Chinese could have produced twice as many cars than they did through the over-capacities that they've had.

And so what you're seeing now is that some of those overcapacities is, or there's a threat that some of that overcapacity is actually now being exported to the Western markets. And again, that takes us back to the whole discussion about terrorists and terror protectionism. But it is that entire approach, I think, that we've seen the last 10 to 15 years that brought kind of those supply chains together. Okay. Speaking of overcapacity, I mentioned in the intro that there have been these accusations of Indonesia of essentially flooding the market with low grade and, low price nickel. What impact has the dominance of Indonesia on the nickel market actually had on other businesses? So if I put it very simply, I think for China, it's almost always about quantity, not about

value, about volume, but not about value. And so coming back to preventing bottlenecks through the supply chain, when you're looking at the industrial policy, I think what China wants to prevent is constraints and bottlenecks and therefore higher prices that would effectively make it difficult for the strategic industry like the EV manufacturers to produce those EVs.

And so what we see in Indonesia at the moment is a lot of discussions about where the production costs are Indonesia, what is a marginal cost? Because ultimately, if you're prioritizing volume over value, then you're producing at costs. Now, the problem for the producers

outside China is if that is the name of the game, there is not a lot of fat in producing nickel. And that's why we've seen the Western producers like BHP and Anglo actually taking a relatively bare view on their nickel assets. BHP actually is probably the one that I would, you mentioned Anglia before, but BHP is the one that I would highlight potentially even more. So they have one operation in Australia called Nickel West. It's a really significant side, big side actually. And a few years back, we thought that that could actually be the supplier of choice to the Western or to the EV industry.

But that's actually one of the assets that BHP doesn't assign a lot of value to anymore these days. So prices have just come down so much that this big project in Australia can't make much more. Yeah, it's effective. A lot of short daily news podcasts focus on just one story. But right now, you probably need more. On Up First from NPR, we bring you three of the. the world's top headlines every day in under 15 minutes. Because no one's story can capture all that's happening in this big, crazy world of ours on any given morning.

Listen now to the Up First podcast from NPR. I want to go back to something you said in the beginning about the two different types of chemistries. So on some basic level, the nickel-based batteries are not as efficient as the sort of the chemistry that's in the West. But the Chinese batteries are like the best in the world, right? Yeah. So again, this is, you would have to go back because the sector is evolving a lot at the moment. So initially, I think when we started talking about the EV industry, the idea was, and that's seven, eight years ago, that nickel-based batteries are the battery of choice in China and potentially outside China. The Chinese always had that lithium-iron phosphate battery, which doesn't contain any nickel.

but initially because it was a much lower energy density was never thought to be kind of the disallowed, but there was a lot of, again, innovation in that space and those batteries have become much, much better. They are folded differently, they are put together differently, so the energy density has actually increased as well. And so now you almost have this second lithium-a-and-phosate market

that is becoming another mainstay of the industry. So is it just to understand this better, in theory, or the sort of, the, you know, in the sort of the chemistry lab, so to speak, the nickel-based batteries due to the lower energy density, higher energy density. The nickel-based batteries of higher energy density. They're normally the better batteries,

lithium-on-phosate batteries, that the Chinese produced historically had the lower energy density. That's why... Oh, I got confused. But the idea always was, well, you need to have those nickel-based batteries if you wanted to have a thousand-kilometer driving range in the V side of things.

And so in the U.S. we have nickel-based batteries. In the ESCEF2. Got it. Okay. Sorry. Thank you for clarifying. Well, okay.

On this note, I think the U.S. and Europe would agree that EVs are a strategically important thing that we want to have more of if we're serious about the clean energy transition. And yet there seems to be this tension where mining a component or a material that is actually quite important for these things, viz the batteries, is just not that profitable in the current. situation. So what do they do about it? How do we resolve that tension? That's the focus at the moment, yes. How do you resolve that? I think tariffs for these of the better words. I think that's one thing that is clearly being discussed at the moment. So if you don't allow any Chinese

EVs onto the U.S. market, which is seemingly the direction we want to take, then by definition, you're giving your domestic car manufacturers a bit of breathing space to develop your own industry. The DOE is also looking at different ways to boost nickel supply. So there's a lot of focus, for instance, on the recycling side of things. There's also a lot of focus now on assets outside the Chinese supply chain. I think there were envoys from the US government in Indonesia to discuss a limited free trade agreement,

with Indonesia too. So there's a lot of movement, but it's not impossible. And I think there will be solutions to the shortfall of critical materials that we do face to some extent on the way to net zero. But both US and Europe do have a fair bit of catching up to do in the coming years. Right now, so obviously with the inflation reduction act, but also the rise of Tesla and others, you know, there's more of a domestic battery industry. In fact, I think we talked to the CEO of one of the companies. Oh, yeah. Several months, Novonics.

We're US-based battery companies, startups or various stages in development. Where are we right now sourcing most of our sort of critical components for them? Or critical minerals or critical elements for batteries? Look, there is an existing nickel market actually. Yeah. There's an existing nickel market actually. But where do we import it from? What is the big export or exporters to the U.S.?

So when you're looking at the key nickel producing countries, outside Indonesia and China. There's Brazil. There's Canada. Australia as well. The latter two actually have got agreements with the US in place. I think the question really comes more pressing when you're looking five, six, seven, eight years out.

The less cars with a combustion engine you're putting on the road, the more pressing it then becomes to actually make sure that you have got the raw materials available. And again, taking a step back, what we're seeing actually at the moment is in the Western world that the EVs, the pure battery electric vehicles, are actually downgraded a little bit. So we actually have to take down our penetration rates. What we're seeing more is kind of that intermediate solution where you're putting hybrid or plug-in hybrid electric vehicles onto the road. And for those, for instance, you do need less of the critical raw materials.

So that buys you effectively time, potentially to build up more of a supply chain. That building up of the supply chain, I think, is right now the key focus that we have in both U.S. and in Europe. So just broadening out the metals discussion, you are, of course, the head of metals research for B-O-A, so we should ask you about some other things going on as well. But it seems to me like one of the major stories in this market has to be volatility recently. And perhaps copper is the best example of that. So we had Jeff Curry on a few weeks ago talking about how long copper was the trade of a lifetime. And since then, I think it's down what, like 10%, something like that. I would say like a few weeks is probably not the

timescale he was thinking of in terms of trade of a lifetime. But there's definitely been a lot of volatility. And it feels like there's a weird dynamic going on where like part of the thing causing volatility is the restriction in, is the tight physical market, basically. So we're seeing these big swings up and down, partly because we need more of this stuff. What's going on there? So copper is really, really different to nickel. On nickel, we had the reserves and the resources, the deposits in Indonesia. On copper, you don't.

It's a very mature market. Some of the best assets or mines that we actually have in the world have been running for decades. And it's very hard to find really good new assets. In fact, when you're looking at some of the projects that are currently in the world, the pipeline, just to highlight the difficulty in bringing those lines. Some of those were discovered almost 30 years ago. So it took you almost two generations to bring them to the market. And so we now facing an almost empty project pipeline. What doesn't help either on the copper side is that during the past 10 years, during the past decade, we had a bare market effectively.

I bet you, in 2015, I would not have been sitting here because there was not a lot of interest in the metals in the metal side. And so think about it shortly after that or doing that during those 10 years, Glenghor almost went bankrupt. How did the miners react to that? Cut Kappex. And the equation there is very simple. You don't spend, you don't produce further down the line. And that's not even something that the Chinese government through a strategic industrial policy can resolve. If you don't have the assets, you just cannot produce. And so you're now effectively in a situation where copper supply growth is really tailing off. It's coming down. But structurally, you have got much higher copper demand growth. Over the last two decades, potential copper demand growth was maybe 2%.

Out until 2050, we can justify annual copper demand growth of 4%. So twice as high. And you don't have the supply growth. And that's, I think, where then the volatility then effectively comes in, because if you don't have the safety buffer, so the inventories that can help. even out shortfalls here and there. That's what ultimately creates that volatility. The one point I would make about some of the calls that we have seen in the copper market, like I've seen $15,000, I've seen $40,000. That's all fine, I think, if it's a long-term view,

but it also is a little bit of a disservice to the industry, to your point. Say more. I give you a very simple example, say over the last two to three weeks, for instance. So we've had, it's more on the option space, but we've had an explosion in interest on the coal side. So calls got really, really expensive. But then we also saw how the buying started to subside a little bit. And so what has been a very popular position recently in the last few days is actually selling copper upside through those calls. Now, if you believe in copper hitting $40,000 per time imminently, you're not taking that position.

So I think with all of those bullish calls, it is important that we right-size them and that we caveat them. Because if you're just saying, oh, we are bullish copper and it's going to the moon, you're missing an awful lot of profit along the way. And the point that you just make, yes, it looked good copper for a while. But right now we're digesting that gains. It's those periods, I think, where you see dislocation to the market that you actually want to trade. So I think we need to take a little bit of a more nuanced view on the market than just saying. I look copper is going through the moon. I think the tricky thing with trying to understand where copper is going

is just the sort of sheer physical reality of there is a lot of demand. As you said, the demand growth is going to basically effectively double. And there's this sort of empty project pipeline. And so you're like, well, yeah, of course copper has got to go to the moon. How does that get resolved? Is there a price at which new projects start to like, all right, we got to start putting shovels on the ground, or to your point, is it a matter of we just need less price volatility rather than a specific price signal itself and then we can start to figure out? It sounds like something

has to resolve. It would be good if you had both, but the problem is I think more than, rather than having less price volatility, we're going to get more price volatility going forward. The price I think that we've, that we're hearing a lot from the miners that we need to justify investment in new mines is minimum $12,000 per ton. But then Glencore is talking more towards, like $13,000, $14,000 per ton. And just to put a reference to that, right now we're trading at $10,000 per ton. And then the whole problem becomes, well, if the miners really wait for prices here, 12 or $13,000 or $14,000 per ton and then start investing, you have a lead time.

So you're not going to resolve those shortfalls imminently. And so the question on what resolves the potential shortfalls on the copper market is a very tricky one. We've seen during the energy crisis around the Ukraine war what happened. So we had, in the run-up to the Ukraine war, we had a very strong copper price rally, and that made many renewable projects loss-making, basically. So we've actually seen how the deployment of green energy slowed down meaningfully. And that's what I would call demand destruction, ultimately. So, and we've been saying that for a while, with the current technology that we have, with the current investment that we see in the mine project pipeline,

it's very, very hard, it's almost impossible to get to net zero by 2050. So something has to give, I think, ultimately, and you see that in the news flow almost daily now, as I think when we put the initial estimates out, we basically said that it was a few years back, that limiting global warming to 1.5 degrees Celsius is going to be very hard.

The best you can do is potentially 1.8, 1.9 degrees, and look what we very enough. That point three is a big, and that copper is a big part of that story. Copper, you need copper in virtually every technology. When you're looking at kind of what the energy transition means, so the decarbonization story, we're effectively talking about electrifying the global economy. So we need power generation, transmission distribution, and then also consumption. All of that is in the form of electricity, and you can't do those technologies without copper.

Copper is effectively ground zero of the energy transition, yes. So I mentioned in the intro that the Indonesian nickel story is something that kind of flew under the radar for me. Copper, not so much. We've done a few episodes. You see the headlines every day now, as you mentioned. But what other things should we be aware of in the metals market right now? Like, what could we possibly be missing? Or what do you get the sense that other people are missing? You better give us a good answer, especially after having shamed us for not talking about nickel and copper in 2015. So, okay, you better give us something. You're in good company there. Let me tell you that. I think that was a global theme.

But I think what really needs to happen, I think we can go into the policy sphere, but we can also go into the commodity fundamentals sphere, for instance. When you're looking at ESG, for instance, ESG is very important, clearly. I think the energy transition is effectively all about ESG. But there is a little bit of a market failure there as well at the moment, because we just discussed it. you can't have the energy transition without actually taking the metals out of the ground. But from an ESG perspective, it is still hard for a lot of investors to actually invest in mining assets. So you want to have the energy transition, but you don't want to have the mining. Well, something has to give here. So that discussion is actually evolving.

I think both the US and the EU actually putting more effort into developing mining assets is certainly helping that discussion. That's one thing. The other thing that I would say is the energy transition clearly is a game change for the metals, in my view. There are some matters we talked about them at the outset, like the battery raw materials, so lithium, cobalt and nickel

that look a little bit better supplied. That might not really quite as much, but then there are those like copper and aluminum, for instance, that really look much stronger from a fundamental perspective. So you do get actually relative value there as well. And I think the third point that I would make is innovation. I think we need to see, or evolution, we need to see different approaches to making

sure that we mitigate the shortfall in those commodities that are actually under supply. Recycling, scrap. That is, for instance, something that is becoming likely much more important going forward as well. And it is one of the least transparent segments of sectors of the metals industry at the Yeah, isn't it one of those industries where people still have to call up the junkyards and ask for the latest pricing? Yeah, I can tell you a funny story about it. There was a few years back. We went to visit a scrapyard, and there was a whole pile of metal lying somewhere

in the corner, and so we asked, was the guy in the scrapyard what that is? And he said, well, it's a dowry for my daughter. I'm saving that for my daughter. So it is a very arcane industry, to some extent, still. a lot of smaller and mid-sized companies operating in there and certainly scope to evolve the way the industry works. I think the other thing I think that would certainly help there beyond just that is, and we're seeing that increasingly as well,

is that governments focus really on recycling rates. How do you make sure that you're actually getting recycling rates up? Do you have designed products differently to make it easier to recycle them? Do you have to compel manufacturers to actually take spend products back and recycle them? So there's a whole lot of development on that front as well. I think that would certainly have the recycling space too. I just have one more question. And you mentioned the sort of, I don't know, market failure,

maybe market harmonization problem in which, in order to have the energy transition, you actually have to invest in a lot of dirty businesses. And we've done some episodes in the past, or at least one that I recall about the amount of water consumption of copper mines in Chile and some of the backlash there. Is that a growing issue? And I'm curious also in Indonesia and the local environmental impacts of all this nickel production. Is there any sort of backlash happening there in the vicinity of these? And like what's sort of the general state of play on that stuff? Yeah, I think that's certainly when I said before that from an ESG standpoint, it's still hard to some extent investing in mining assets. I think mining historically has not been the cleanest of all industries. But I think the miners are trying very hard to mitigate that.

So when you're looking at water being used in the mines, I think there is an effort, for instance, to actually have more of a runaround system. So the water is once in the mine to produce the copper, you're effectively cleaning up and then putting back into the industry. There are some operators that are better than others. What we're seeing increasingly is that the better the operators are, the better the miners are in engaging with local communities on the environment, on the social compound. the more likely it is that you get an interrupted supply. So I think the industry over the last 10, 15 years, has certainly gone a little bit through a learning curve and has been trying to become a better corporate citizen.

All right, Michael Vidmer. Thank you so much for coming on all thoughts and making sense of what's been going on in the nickel market. Five cents, exactly, for us. No, thank you so much. That was so much fun. Thank you very much. Joe, I've really enjoyed that conversation.

That was such a... clear explanation of what's been going on. That was so fun. I love Michael. We have to have a man. I could have talked to him for like four hours. Yeah. I thought his point about the market failure of ESG was a good one and probably one that is becoming

more common now than it was a few years ago. But I think one of the problems with ESG in its early conceptualization is that no one ever really figured out, like, do you want to engage with the dirty industries and make them better? or do you want to stay away from them completely and thereby cut off their access to financing and make them go away in their totality? And I think, you know, a few years on from all of this, we're kind of seeing the result and the idea that you can get this tension where you need to actually engage in a dirty industry in order to promote the clean energy transition. And so stranding that particular asset is problematic in some ways. Let's put it that way. Yeah, I mean, it's always seemed to me like this term ESG means different things, different people.

Some people just don't want to invest in industries that they perceive as problematic in some point. Others, from a more policy-oriented standpoint, have these set of goals. Sometimes those goals and the interests of investors are aligned well, sometimes not so much. I'm just astounded how fast, I guess, like I said in the beginning, one of the few things I knew about the nickel market. I love that you have three factoids about the nickel market, and one of them is actually

a very sophisticated point about the episode that we just had. Well, I remember, like, 2021, 2022, you know, like there was all those, like, poly crisis stuff

and, like, Adam twos and all those guys. And, like, one of them at some... I probably clicked on an article about, like, Indonesia aiming to capture more downstream value, and I, like, stroke my chin.

I was like, I guess that's very smart. I should really capture more of the value coming out of the ground. And so like just one of those things that I'm like, at my next cocktail party, I'll be talking about Indonesia's attempts to capture the downstream nickel market. The Indonesian nickel markets at a real crossroads. And now they're trying to capture more of the value add rather than just the low margin export. But then the other thing is I just did not realize how recent Indonesia's rise was at all. If I would have guessed, is so Indonesia has always been the big nickel exporter.

And now they're shifting. I did not realize that this is basically a story of the last decade. It is phenomenal. The other thing that sort of hit home in that discussion with Michael just then was the technology aspect of it, by which I don't mean EVs, but I mean like the actual processing technology of nickel. And the fact that that's been driving a lot of the increase in production that China kind of cracked this new model for doing it and then just invested a ton in it. Well, you know, one of the conversations we did a couple months ago, or I guess a month and a half ago or whatever,

we did that trip to North Carolina. And one of the companies that we talked to is part of our trip with Tom Barkin, that company Unify. And like one point that has been very lodged in my brain with just the CEO of Unified talking about the huge edge that accrues to Chinese producers of things like advanced textiles due to the sheer scale of the domestic petrochemical industry

that exists in China. And I realize that's not, that's petrochemical. not metals, but it does feel like the sheer scale of refining capacity for petrochemicals, for critical minerals, et cetera, in China is just a huge part of the story here. And whoever has access to that cheaper supply is obviously in a good position. Well, it certainly seems to be a big advantage in something like EV manufacturing. That's for sure. All right.

Shall we leave it there? Let's leave it there. This has been another episode of the Oddlots podcast. I'm Tracy Alloway. you can follow me at Tracy Alloway. And I'm Joe Wisenthal. You can follow me at the stalwart. Follow our producers,

Carmen Rodriguez, at Carmen Armin, Dashel Bennett at Dashbot, and Kail Brooks at Kail Brooks. And thank you to our producer, Moses Andam. For more OddLod's content, go to Bloomberg.com slash OddLots, where we have transcripts,

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