LME Considers New Nickel Contract to Tap Electric Cars Boom

(Bloomberg) -- Buoyed by rebounding trading volumes and signs commodities are attracting more investors, the London Metal Exchange is targeting further growth by tapping the boom in electric cars.

The LME is considering starting a nickel sulphate contract as part of a trio of new products that take advantage of growing demand for battery metals, according to Chief Executive Officer Matthew Chamberlain. The launch is 18 months away at best, he said in an interview Friday, ahead of the metal industry’s annual gathering in London.

“Electric vehicles are clearly the growth story for our industry,” Chamberlain said. The bourse will meet with stakeholders in the electric vehicle market during LME Week to firm up plans for new nickel, cobalt and lithium chemical contracts, he said. 

The LME already offers a contract for refined nickel, mainly used in steelmaking, and the electric vehicle revolution will probably cause diverging markets for the two types of metal, said Chamberlain. 

Base metals volumes on the exchange are on track for the first annual increase in three after a rebound in market activity, said Chamberlain, who took on the permanent CEO role in April. Trading slumped in previous years after an aggressive fee hike and an industry downturn caused hedge funds and banks to retreat from the sector.

Chamberlain has since cut fees amid a raft of reforms and is hopeful that trading will steadily pick up in the coming months.

The CEO said he’s encouraged by signs that large macro investors may be returning to the industry, but sees the biggest opportunity for growth coming from electric vehicles.

Unlike the LME’s existing nickel and cobalt contracts, the potential new offerings wouldn’t be physically deliverable, but would be cash-settled against a third-party price index. It would mark a change in tack for the LME, which has traditionally focused on commodity-grade refined products.

"It’s not in any way a change in philosophy, it’s just a recognition that the LME has done everything it can, at least that we’re aware of, in the physically settled world, and cash-settled contracts are what people want,” Chamberlain said.

"In the case of battery metals, physical delivery just wouldn’t work because the grades and specifications are so specific, so we’ll be doing cash-settled contracts," he added.

In the nickel market in particular, usage and output could shift dramatically amid an electric vehicle boom, according to Oliver Ramsbottom, a partner at McKinsey & Co. in Tokyo. While the electrification of vehicles “poses significant upside risk to nickel demand,” most growth is likely to take place after 2020, Goldman Sachs Group Inc. analysts wrote in a note Monday. Current stocks will be sufficient to meet demand until then, according to the bank.

Steelmakers in China, the largest user, typically feed their furnaces using nickel pig iron rather than the refined nickel cathodes and briquettes stored on the LME. Meanwhile, BHP Billiton Ltd., one of the world’s top nickel producers, is switching output at its Nickel West project in Australia from briquettes to sulphate. It’s looking to gain more exposure to the electric car industry, which is sees growing by about 40 percent each year through 2025.

Demand for briquettes has been slack in recent years, contributing to LME nickel stockpiles tripling in half a decade. But with less production and higher demand from the battery market, those inventories may start to be drawn down. That could lead to a situation where stockpiles of nickel underpinning LME prices are mainly in the form of cathode, a product that’s rarely used in either steelmaking or battery manufacturing.

Launching a separate nickel sulphate contract will help the LME’s prices to remain relevant to both sectors, Chamberlain said.

--With assistance from David Stringer

To contact the reporters on this story: Mark Burton in London at mburton51@bloomberg.net, Jack Farchy in London at jfarchy@bloomberg.net.

To contact the editors responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net, Nicholas Larkin

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