Tesla & BHP strike major deal in race for ‘sustainable nickel’

BHP Billiton has agreed a long-term supply contract for class 1 nickel with one of the world’s leading electric vehicle (EV) and energy storage producers, Tesla.

Benchmark estimates that the contract is worth up to 18,000 tonnes of nickel per year starting in 2022.

It adds to two more nickel supply deals that Tesla has likely secured to lock up its expected demand from 2022 onwards with Prony Resources and Vale.

Tesla has acted early to secure significant volumes of nickel to fuel its lithium ion demand with cell partner LG Energy solution (LGES) for vehicles produced in China in the near term and its own upcoming lithium ion battery cell production in Austin, Texas and Berlin, Germany.

Benchmark estimates that as of 2022 onwards 50% of Tesla’s lithium ion battery chemistry will be high nickel cathode (NCM and NCA). The other half will be LFP based chemistry, primarily focused around cell and vehicle production in China with cell partner Contemporary Amperex Technology Ltd (CATL).

The disconnect between supply of suitable key battery raw materials and demand is growing ever greater Benchmark forecasts.

To date the battery demand on the nickel supply chain has been limited compared to the total market size, with demand set to reach 184,000 tonnes in 2021 versus a total market demand of 2.4m tonnes.

But this relationship is set to change with Benchmark forecasting that nickel demand from the battery sector will surge to 1.7m tonnes by the end of the decade, with the battery supply chain representing 35% of total demand, up from a little over 5% today.

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Whilst the nickel market appears to remain balanced through to the mid-2020s, only a limited amount of this supply can be accepted by the battery industry, based on the form it is mined and produced, but also environmental, social and governance (ESG) concerns associated with its production.

These concerns have seen fears grow about long-term security of nickel supply increase amongst automakers, initiating a scramble to lock up suitable supply.

These sourcing concerns are only heightened as the battery industry’s demand for nickel ramps with Benchmark nickel sulphate prices having spent the best part of 2021 increasing.

Prices have risen from RMB 29,250/tonne ($4,450) as of the December 2020 issue of the Benchmark Nickel Price Assessment to RMB 34,000/tonne ($5,270) on an EXW China basis in the latest June Assessment, an increase of 16.2%.

Not only have nickel sulphate prices increased, but payables for nickel contained in mixed hydroxide precipitate (MHP), the preferred feedstock of the battery industry, have also risen to an average of 91% in Benchmark’s June 2021 Assessment up from 84% in December 2020.

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Enough nickel for 1.25m Tesla Model 3s annually 

The BHP deal, which is the first public deal of its kind for a major western automaker, will see volumes of coarse metal powder and/or sulphate delivered to Tesla’s supply chain partners from BHP’s Nickel West operations in Australia, although the announcement did not reveal specific volumes.

Whilst the announcement marks a significant milestone for the nickel market, Benchmark believes that the supply contract with BHP makes up the last of three rapid succession deals made by the automaker in 2021, potentially securing enough nickel to produce cells for up to 1.25 million standard range Model 3s annually.

The Nickel West operation, which BHP had previously intended to offload, has become the leading asset of its energy transition assault as the company has looked to ride the wave of growing demand from the battery sector.

Nickel West, which produces 90,000 tonnes of nickel annually, has long been a focal point of future battery ready nickel supply for the industry after BHP began work on converting its Kwinana refinery away from nickel briquette and powder to battery-focused nickel sulphate in 2018.

Since then, BHP has acquired several nickel sulphide deposits in close proximity to the Nickel West plant in Western Australia to enhance its access to suitable feed for the operation.

However, with commercial production initially pencilled in for 2019, development work at the Kwinana refinery has been slow to proceed, as the operation has suffered numerous delays after being plagued with rumours of technical and quality issues.

BHP’s most recent announcements suggest that commercial production of nickel sulphate is due to begin in the second half of 2021. Previously the company had outlined a planned capacity of 100,00tpa of sulphate, equivalent to 22,000 tonnes of nickel content or about 25% of Nickel West’s total capacity.

This suggests that Tesla may receive roughly 75% of the material as nickel metal powder with the balance as sulphate, although the operation could provide 100% metal should this have been agreed by both counterparties.

Tesla secures sustainable nickel in suitable form 

For Tesla, the deal makes a lot of sense, as it provides the company with a secure supply of sustainable nickel, primarily in a form that is well suited to dissolution and conversion to nickel sulphate, whilst largely avoiding the additional transport costs associated with sulphate, which contains about one fifth the nickel content of the metal.

Tesla’s nickel concerns have been well documented as far back as July 2020, when CEO Elon Musk famously stated “Tesla will give you a giant contract for a long period of time if you mine nickel efficiently and in an environmentally sensitive way” during an earnings call.

Concerns over the availability of nickel for the battery industry are well founded, with Benchmark forecasting demand for the mineral to increase from 184,000 tonnes in 2021 to in excess of 1.7m tonnes by 2030.

To put this into context, the entire global market for nickel in 2020 reached 2.4m tonnes, so the challenge of scaling suitable battery ready supply is evident, particularly once you factor in competing demand from the growing stainless-steel industry.

Concerns over tight nickel supply were seemingly eased in March 2021, when Tsingshan, the worlds’ largest nickel producer, announced it would supply nickel matte derived from nickel pig iron (NPI) produced in Indonesia to Huayou and CNGR.

Whilst NPI is not new to the global nickel supply chain, converting it to high grade matte marked a new route to the production of battery grade nickel sulphate, and with easily scalable volumes of NPI available – Tsingshan alone outlined plans to increase production capacity from 600,000 tonnes in 2021 to 1.1m by 2023 largely from NPI – supply concerns temporarily abated.

However, many have since questioned whether this as a plausible supply source due to the energy intensive nature of the NPI to sulphate conversion route, with consensus so far that the material will not meet ESG and LCA emissions requirements.

The other emerging supply option for Musk was mixed hydroxide precipitate (MHP) from high pressure acid leach (HPAL) operations, with a number of new projects expected to enter production in the coming years, largely located in Indonesia.

MHP is an intermediate product of nickel laterite ore processed via a hydrometallurgical route, typically containing >35% nickel, and has grown to be the nickel feedstock of choice for the battery industry.

Indonesian MHP, whilst being more favourable on an emission standpoint than nickel matte, is not without its controversy.

Originally the slew of Indonesian HPAL nickel operations in the pipeline had planned to utilise deep-sea tailings, the process of disposing of mine spoil in the ocean, but this is thought to be harmful for the environment, compiled with little understanding of the long-term impacts of such a practice on the deep sea environment. Following widespread concern, the Indonesian Government announced they would not issue the permits needed for deep-sea tailings.

As such, new operations would need to use either a tailings dam, which poses substantial, although better understood risks in a region susceptible to seismic activity, or a process known as dry-stack tailings, a way of backfilling the mine, albeit at higher cost which can also require the clearing of primary rainforest.

Whilst the intention may be to move these operations to dry stack tailings, it remains unclear whether this will be a reality for those operations already in construction and fundamentally hard for the auto supply chain to commit to a long-term supply agreement without proof tailings management would align with the ESG requirements of the downstream.

To further complicate the issue, dry stack tailings can add significant cost to operations, with estimates running into hundreds of millions if not billions of dollars depending on size. Whilst this is a necessary step, it will further push up the incentive price (the price required to incentivise the investment in new supply) for these Indonesian HPAL projects which risks delaying new supply coming to market.

Further to mine level management, ESG concerns have also stemmed from the fact that Indonesia’s energy mix is set to remain reliant on thermal coal and that the construction of new mines or renewable power in the region often involves clearing of primary rainforest.

Due to the issues outlined above, downstream consumers and the auto supply chain have had long running concerns over where to source sustainable nickel, in a suitable form for conversion to nickel chemicals needed for lithium ion batteries.

Tesla’s nickel assault

Until this latest public deal with BHP, by joining the dots it appears Tesla has worked quietly behind the scenes to mitigate these issues through a number of unannounced deals.

The first deal was quietly revealed as part of a wider announcement of the Prony Resources consortium takeover of Vale’s New Caledonian operation, Goro in March 2021, in which Tesla joined the group in a technical advisory role, prioritising sustainable development.

Whilst not widely picked up on by mainstream media, local reports confirm that as part of the advisory role played by Tesla a long-term supply agreement was reached.

The mine produces MHP via a HPAL process and utilises dry stack tailings, and whilst the operation was placed on care and maintenance during the process of the sale, it has now been restarted and first production is expected to be exported in July 2021.

The second of Tesla’s potential nickel deals is harder to spot, and has not been publicly confirmed, and so has been drawn from indications by the two companies.

The first indication was nestled within the Vale Q1 2021 earnings call held in April of that year where Mark Travers, Executive Vice President of Base Metals stated the company “recently signed a significant multi-year contract with an OEM… it represents about 5% of our class 1 nickel”.

Vale’s class 1 nickel products include metal rounds, pellets and ultra-fine powder, with the powder being the most suitable form for use in the battery supply chain due to the slower dissolution rates of pellets and rounds.

Whilst the ultra-fine powder can be used by the battery supply chain it usually attracts a significant premium meaning it can be too costly to use for the industry.

To link this to Tesla, it is necessary to go back to its Battery Day in September 2020 where one of the key milestones the company looked to achieve was a direct metal to cathode process, where in one processing step metal powder could be converted directly to cathode material, cutting out much of the current industry standard multi-step process to reduce costs.

Vale is the only company to produce ultra-fine nickel metal powder at its Clydach Nickel Refinery in the UK and Copper Cliff Refinery in Ontario, Canada, which is the best suited product for the metal to cathode process outlined by Tesla.

With Tesla being one of the few Western automakers directly sourcing battery raw materials, it is the most likely candidate for the supply deal mentioned by Travers.

Sustainability focus

As part of the most recent supply deal, BHP announced it will work with Tesla on sustainability “with a focus on end-to-end raw material traceability using blockchain; technical exchange for battery raw materials production; and promotion of the importance of sustainability in the resources sector, including identifying partners who are most aligned with BHP and Tesla Inc.’s principles and battery value chains”.

Whilst the above criteria are quite far ranging, it highlights the continued significance of sustainability across the supply chain as EV manufacturers look to reduce total life cycle emissions associated with production of EVs, with BHP stating as part of the announcement that Nickel West is “one of the most sustainable and lowest carbon emission nickel producers in the world”.

Supply chain security

Between the three nickel deals outlined in this article Benchmark estimates that Tesla could have secured up to 55,000 tonnes of nickel, enough to produce up to 1.25m standard range Model 3 vehicles annually, using high nickel NCM cathode technology, equivalent to 2.5 times the company’s entire production in 2020.

Should all of the deals be confirmed they would likely cover a significant proportion of Tesla’s forecasted nickel requirements through to the mid-2020s and beyond.

The agreements mark another proactive step from the company in securing battery raw materials directly at the mine level, which is viewed by Benchmark as the most robust supply chain strategy for automakers. Prior to the BHP deal Tesla had entered into a number of direct sourcing deals for other minerals including lithium hydroxide supply from China’s Ganfeng Lithium and Livent, and a widely rumoured, but unconfirmed, cobalt supply deal with Glencore.

Alongside guaranteeing security of supply, the company has targeted credible suppliers with a focus on ESG and sustainability credentials, something which some alternative supply sources may not be able to achieve.

Furthermore, with political tensions rising between the US and China, the choice of non-Chinese suppliers is probably not a coincidence either, with much of the new Indonesian HPAL operations under Chinese ownership.

As the amount of suitable nickel supply available to the battery industry dwindles there is a decreasing window of opportunity for other automakers to secure long-term agreements of the nature that Tesla has managed.

Not only will this leave those slow to act with a smaller volume of material to bid for, but the nickel that is left will likely come from less credible and potentially less sustainable sources, under less favourable contract terms.

This is nothing new for the battery supply chain, with this already playing out across the cobalt and lithium markets as consumers scramble to secure the remaining units available for long term supply.