'Green' nickel market too illiquid to trade on contract, lacks definition: LME

Low-carbon emission nickel trading is still too illiquid to be traded on a separate futures contract, the London Metal Exchange said March 5.

In a note on its website, the LME responded to recent comments in the market that there should be a separate contract for "green" nickel with a premium. The LME, however, said the exchange would not launch a separate contract at this time amid a lack of industry definition and trading of lower-carbon emission nickel.

"Noting the need to increase the amount of LME-eligible metal available to protect the established LME Nickel contract, the LME believes the market for 'green' nickel is not yet large enough to support vibrant trading in a dedicated green futures contract," the LME said.

Nickel miners have recently increasingly been talking about the potential of a premium for low-carbon emission nickel 1.

"Market participants have expressed concern that there remains significant market debate as to how to define 'green', and further, that an LME contract representing a narrower sub-segment of the market would not attract sufficient stocks and trading volumes to be viable," the LME said.

German car federation VDA said in February that the one of the main problems would be where to source lower-carbon emission nickel from as VDA members switched from comparatively lower-CO2 emission nickel from Russia to Indonesian nickel which would have around eight times more CO2 than Russian material.

Australian miner BHP said in its February economic commodity outlook report that the decision by the LME to approve Indonesian nickel had led to a price decline of the LME benchmark price. The miner also said the LME should set more sustainability targets for nickel producers.

"Producers adopting more sustainable practices could be disadvantaged in this environment, with their efforts not yet recognized with a commercial premia that could help buffer profitability when the base price declines to cyclical lows," the miner said.

Alternatives such as nickel sulfate, matte or other nickel class 2 materials could be considered, according to the LME, based on market feedback to lower CO2 levels. However, "limited support exists for such initiatives, with a majority of market participants taking the view that dedicated contracts would detrimentally fragment liquidity and potentially undermine the utility of LME Nickel as the primary risk management tool used by all segments of the market" the LME said.

Moreover, an industry defined standard of what constitutes as "green" would also be needed for trading. The LME recommends that also environmental sustainability goals including respect of labor rights should be included in a definition besides carbon footprint.

Wide variety of CO2 levels

According to the LME, the carbon footprint for a metric ton of class 1 nickel can vary widely, ranging from 6 mt to more than 100 mt of CO2 equivalent mt of metal. The range is typically a function of the extraction method, the number of conversion steps and the refining methodology used.

"Based on its market engagement, the LME has determined that a threshold of 20 mt of CO2 equivalent (or less) across scopes 1-3 is an appropriate level to start the identification of a low-carbon nickel premium," the LME said, adding that it would see the Nickel Institute's guidance as the most appropriate, which looks at full lifecycle emissions, including the precursors to refined nickel metal such as ores, concentrates and intermediates.

The exchange said it believes that a two-tier market will emerge where the metal with the "best" sustainability credentials would attract a premium price. This has been the case in other metals products such as steel.

LME cash nickel settled at $17,600/mt March 5, up from $17,575 March 4.

Platts, part of S&P Global Commodity Insights, assessed nickel sulfate at $4013/mt DDP China March 5, up 0.7% on the day.