"Green" nickel vs. "dirty" nickel - A balancing act between sustainability and market dynamics

Nickel plays a pivotal role in the global economy, powering sectors from technology to manufacturing.

Indonesia's emergence as a dominant force, particularly in nickel production for electric vehicle batteries as well as stainless steels, has brought increased scrutiny to the environmental and social impacts of its mining practices. These concerns have sparked a broader discussion about the need for sustainability and responsible sourcing across the mining sector. The pressing issue of sustainability and responsible sourcing in the mining sector is underscored by the debate over "green" versus "dirty" nickel primarily driven by the environmental impact of mining practices in Indonesia.

Mining operations in Indonesia, especially nickel mining, have been criticized for causing deforestation, generating mining waste pollution, and emitting high levels of carbon due to reliance on coal-fired power. These practices have not only environmental but also social repercussions, contributing to a growing call for enhanced ESG standards in the mining industry. The challenge is to balance economic growth with environmental protection and social responsibility.

Liquidity concerns

In response to these pressures, major mining companies have advocated for the LME to differentiate between sustainably sourced (green) and conventional (dirty) nickel. This initiative aims to establish a green premium to reflect the environmental costs of production. The LME has introduced responsible sourcing guidelines and expressed support for sustainability measures, although the complexity of implementing a separate contract for green metals remains a point of contention. The proposal to differentiate nickel based on sustainability criteria, while aimed at promoting responsible sourcing and environmental stewardship, introduces complexities regarding market liquidity. The 2023 LME trading halt highlighted the vulnerabilities within the nickel market, underscoring the need for stability and liquidity to ensure efficient price discovery and risk management.Fragmentation of the Market: Splitting the nickel contract could lead to fragmentation, creating separate pools of liquidity for green and conventional nickel. This fragmentation may reduce the depth and resilience of the market, making it more susceptible to volatility and less attractive to investors seeking liquid and stable markets.

Impact on Price Discovery: Effective price discovery relies on robust market liquidity. By dividing the market, there's a risk that price signals for nickel could become less clear, complicating investment decisions and hedging strategies for producers and consumers alike.

Barriers to Entry: New contracts may impose additional barriers to entry, especially for smaller producers and consumers who may find it more challenging to navigate a more segmented market. This could further concentrate market activity among larger players, potentially reducing competitiveness.

Transition and Adaptation Costs: Implementing and adapting to a split contract system would entail significant costs for all market participants, including changes to trading platforms, reporting systems, and compliance protocols. These costs could deter participation, especially in the initial stages of transition.

Advantages of a Green Nickel Premium

In light of the concerns surrounding market liquidity and the potential complexities of splitting the nickel contract into "green" and conventional categories, an alternative approach merits consideration. Implementing a premium for green nickel, rather than establishing separate contracts, presents a viable strategy to promote environmental responsibility while mitigating the risk of market fragmentation. This approach aligns with the industry's sustainability goals without compromising the efficiency and liquidity of the nickel market.

Simplicity and Market Unity: A premium system maintains the unity of the nickel market, avoiding the complexities and potential liquidity issues associated with splitting the contract. It simplifies trading and risk management for participants by keeping a single, cohesive market structure.

Incentivizing Sustainable Practices: By rewarding producers who meet stringent environmental and social governance (ESG) criteria with a premium, the market directly incentivizes sustainable mining practices. This mechanism aligns financial incentives with sustainability goals, encouraging more producers to adopt responsible sourcing methods.

Flexibility for Market Participants: A premium for green nickel offers flexibility to both buyers and sellers. Participants seeking to support sustainability can opt to pay the premium for green nickel, while others can continue trading conventional nickel without alteration to their existing strategies. This flexibility ensures that the needs and preferences of a diverse market are accommodated.

Enhanced Transparency and Traceability: Implementing a green nickel premium necessitates stringent verification and certification processes to ensure the sustainability of the nickel being traded. This requirement can enhance the overall transparency and traceability of nickel sourcing, benefiting the entire supply chain.

Market-Driven Environmental Impact: The premium model leverages market forces to drive environmental improvements. As demand for green nickel grows, the potential premium that producers can command serves as a powerful motivation for adopting cleaner, more responsible mining and processing technologies.

In conclusion, the critical role of nickel in the global economy, especially within the technology and manufacturing sectors, has spotlighted the urgent need for sustainability and responsible sourcing practices. Indonesia's position as a leading nickel producer for key industries like electric vehicle batteries and steelmaking has brought to the fore the environmental and social challenges associated with mining operations. The call for improved ESG standards reflects a broader demand for a balance between economic growth and environmental protection, underpinned by the ongoing debate between the virtues of "green" versus "dirty" nickel.

The proposal by major mining companies to differentiate nickel based on sustainability criteria, while well-intentioned, poses significant challenges related to market liquidity and complexity. The concerns about market fragmentation, impact on price discovery, barriers to entry, and transition costs underscore the need for a solution that balances environmental responsibility with market stability. The alternative of implementing a green nickel premium, instead of creating separate contracts, offers a pragmatic approach that promotes sustainability without compromising the efficiency and liquidity of the nickel market.

Adopting a premium system for green nickel aligns with the industry's environmental goals while ensuring market unity and simplifying trading mechanisms. It directly incentivizes sustainable mining practices, offers flexibility for market participants, enhances transparency and traceability, and leverages market forces to drive environmental improvements. This approach not only addresses the critical concerns of environmental and social responsibility but also preserves the market's ability to function efficiently, thereby serving as a model for other sectors grappling with similar sustainability challenges.

Following the LME's suggestion, Metalshub is set to start publishing monthly reports on low carbon nickel transactions beginning in March. Since its foundation in 2016, Metalshub has been at the forefront of digital innovation, providing a top-tier software solution for the procurement and sales management of raw materials. Dr. Sebastian Kreft, co-founder and managing director of Metalshub, has raised questions about the necessity of a distinct contract for 'green' nickel. He supports the idea of suppliers and buyers negotiating directly to determine the premium for green nickel. To fill the existing gap in the market for clear pricing of green nickel, Metalshub plans to introduce an index price that reflects the market demand for nickel that is environmentally friendly. The platform allows for the listing of nickel with detailed ESG credentials, making it easier for buyers interested in low carbon intensity options. This approach negates the need for a separate LME contract to establish a 'green' premium.

This initiative is a pivotal step in integrating ESG factors into metal trading and lays the groundwork for identifying a premium on green nickel.

Please also check out our report on LME announces approach to the "green" nickel market