Nickel drama highlights Tsingshan’s role in energy transition
Russia’s invasion of Ukraine rocked the global nickel market in a matter of days in March, causing an unprecedented price spike of 250% on the London Metal Exchange (LME). Brokers stared at their screens in disbelief before the LME decided to halt trading altogether and cancel around $4 billion in trades, further stunning the market.
However, the trade suspension helped a company that was set to lose billions from soaring nickel prices: China’s Tsingshan, the world’s largest producer of stainless steel and nickel. Its chairman, Xiang Guangda, had amassed a large short position – betting that nickel prices would fall – and he was now facing ever-higher margin calls to his brokers and the LME as nickel prices rose. It was a severe stumble for a shrewd businessman from Wenzhou, who had built a fortune based on metal.
“It was like watching an elephant get shredded by vampires in a feeding frenzy,” the chairman of Tsingshan’s rival, Ningbo Lygend, said of the “short squeeze”. The drama and turbulence of the event also highlighted a disturbing shift in the dynamics of the global energy transition.
High Indonesian Nickel Emissions
Few people follow nickel prices – they don’t affect our daily lives like oil and gas or change the course of countries and empires. But that could change as electric vehicle (EV) sales pick up in this decade. At the bottom of most electric vehicles are thousands of battery cells containing nickel, lithium and cobalt. To reduce emissions while staying within the current model of private vehicle ownership, traditional engines would have to be replaced by EVs in the tens of millions over the next few years, which always means more nickel. “Nickel is the biggest challenge for high volume, long range batteries!” Elon Musk tweeted in 2020. This means that the geopolitics – and power games – of nickel will become increasingly important.
Russia produces around 17% of the world’s supply of high-purity Class 1 nickel, mostly through Norilsk Nickel, a mining company controlled by oligarch Vladimir Potanin, one of Russia’s richest men. Although neither Norilsk nor Potanin were sanctioned for the war in Ukraine, it is more likely that some buyers will no longer want to use Russian nickel for their electric vehicles. This could force European and American automakers to turn to Chinese companies, such as Tsingshan, for supplies.
A smelter owned by Norilsk Nickel, in the Russian city of Norilsk. After a number of pollution incidents, the company tried to rebrand itself as a supplier of batteries for electric vehicles. (Image © Liza Udilova/Greenpeace)
Tsingshan was undoubtedly scarred by his experience on the LME, but the exchange’s decision to halt trading helped minimize his losses. With revenues of 352 billion yuan ($53 billion) last year, the company is big enough to recover from the debacle.
It is likely that Xiang will enter the battery market with the same determination it used to become the world’s largest and cheapest stainless steel producer.
The Rise of the Tsingshan Nickel Empire
Tsingshan has its origins in the explosion of private enterprise in the city of Wenzhou, Zhejiang province, in the 1980s, following reforms introduced by Deng Xiaoping to loosen the state’s grip on the economy, embodied by the “Wenzhou model”.
As Wenzhou’s private economy began to flourish, Xiang and his relative Zhang Jimin decided to leave public sector security and founded a company to manufacture car doors and windows in 1988. They eventually established a company of stainless steel in 1992, which was one of the first private steel producers in China.
In the mid-2000s, Tsingshan helped develop a revolutionary process for making stainless steel by producing molten nickel pig iron and hot loading it directly into a stainless steel plant. The method significantly reduced costs but increased energy consumption.
Yet, at the time of the 2008 global financial crisis, Tsingshan and the rest of China’s steel industry faced a shortage of nickel. “Sixty to seventy percent of our stainless steel is nickel, but who produced this nickel?…China didn’t have its own production,” Xiang recalled. So in 2009, Xiang decided to go to the world’s largest producer, Indonesia, and invest in nickel mining. “The decision was forced on them,” because of the nickel shortage, a person who knew Xiang well told me. It would later pay off handsomely.
In October 2013, Tsingshan signed an agreement with a local partner to establish Morowali Industrial Park on the island of Sulawesi to produce nickel pig iron and stainless steel. Although the region is remote and without electricity, it was a key part of Indonesia’s strategy to extract more value from its natural resources. The key to unlocking this promise was Tsingshan.
Tsingshan has started turning Morowali Park into a giant stainless steel and nickel factory, complete with a four-star hotel, a runway, a port and a 2-gigawatt coal-fired power station. The park employed some 38,000 workers and the project received hundreds of millions of dollars in loans from Beijing’s major strategic lenders, China Development Bank, China Export-Import Bank and UK bank HSBC.
Today, Tsingshan is the world’s largest nickel producer, accounting for around 20% of the global market. The Morowali park mainly produces nickel pig iron for stainless steel. But since last year, Tsingshan has also started producing a source of nickel for batteries. It achieves this by making nickel matte, an intermediate form of nickel that contains about 75-80% of the metal. It is also working through two other joint ventures – with Chinese cobalt producer Huayou Cobalt and battery recycling company GEM – to produce mixed hydroxide precipitate (MHP) for batteries.
Meanwhile, downstream in China, Tsingshan has ventured into battery manufacturing, which will be constructed from the company’s nickel. Tsingshan has a well-capitalized battery subsidiary, Ruipu Energy, and an energy storage developer, Foxess. This year, it invested $375 million to build a lithium plant in Argentina with France’s Eramet, and also reached an agreement with China’s SAIC Motor to invest 5.5 billion yuan ($824 million) in the construction of a battery giga-factory in the southern province of Guangxi.
How will the mountains stay lush?
With investments from Tsingshan and other Chinese companies, such as Huayou Cobalt, Indonesia is expected to be the main supplier of nickel for electric vehicle batteries by 2025.
But the production of nickel matte in Indonesia comes at an environmental cost. According to the International Energy Agency, this requires large furnaces that are largely dependent on captive coal power in the country and can emit almost six times more carbon dioxide per ton than nickel production in the country. Canada.
Additionally, nickel mining often requires the stripping of large areas of upland forest to access lateritic nickel ore near the surface, which can result in runoff that impacts communities. Additionally, many nickel mines also produce hexavalent chromium, which can harm human health. It’s the chemical that Erin Brockovich campaigned on in the United States in 1993, leading to the Oscar-winning Hollywood film named after her.
A nickel mine and processing plant in South Sulawesi, Indonesia. Extracting nickel ore from the ground often means stripping vast tracts of forest and producing toxic pollutants. (Photo: Hariandi Hafid / Alamy)
Processing low-grade lateritic nickel ore, with a nickel content of less than 2%, consumes significantly more energy than higher-grade ores such as nickel sulphides widely used outside Indonesia. It also produces waste that can impact the local environment if not properly disposed of. Chinese nickel projects could produce millions of tons of waste this year, according to estimates by Russian company Norilsk Nickel.
At the Chinese-owned Ramu nickel mine in neighboring Papua New Guinea, mining waste is dumped directly into the open sea, a process that can choke the seabed and damage marine ecosystems if the waste resurfaces. Chinese companies in Indonesia initially wanted to use the same process, but after objections from the government it seems more likely that they will store their waste on land, using a process known as ‘dry cell tailings’. Ningbo Lygend, a Chinese company that has built a nickel processing plant in Indonesia for the electric vehicle battery market, recently warned in its Hong Kong stock exchange listing application that it would cost more.
Will automakers be willing to accept nickel from Indonesia, despite its environmental footprint? The evidence suggests they will. In March, Volkswagen China announced that it had signed an agreement with Huayou Cobalt and Tsingshan to develop nickel and cobalt resources in Indonesia. Huayou and Volkswagen China said their project would be sustainable without giving further details.
The carbon footprint of Morowali Park – a key infrastructure project of President Xi’s Belt and Road Initiative – will help determine its legacy in countries like Indonesia. In March, China’s National Development and Reform Commission said, “[We must] make green the background color of the belt and the road.
Will it be a green belt and road? In March 2021, Tsingshan, which means “lush mountains” in Chinese, announced that it would build 2 GW of renewable energy in Indonesia. The company also pledged to abide by Xi’s pledge not to build any new coal-fired power plants overseas. But a green BRI also requires moving away from the problems of yesteryear: deforestation, dumping mining waste into the ocean, and reliance on dirty coal-based energy sources.
Unless Indonesia forces its nickel industry to clean up by using more renewable energy and properly disposing of its waste, the country will bear a growing environmental burden from the electric vehicle revolution. “The net result is that we have clean air in our cities – but then we destroy an area rich in biodiversity,” said Indonesian environmental activist Pius Ginting.
The way of the industry will probably be in the hands of Xiang and Indonesia. Without Russian nickel, Indonesia has a growing role to play in the automotive industry’s transition to electric vehicles. If Xiang can recover from his misguided trade bet, he could still be a winner in invading Russia.