The global price of nickel collapses, and Australian miners are hurting

This article in The Conversation yesterday by Mohan Yellishetty (Monash University) discussed the state of the global market for nickel:

Nickel is a metal crucial for the production of stainless steel, alloys, electroplating and the batteries used in electric vehicles.

The global price has dived from a high of US$50,000 in 2022 to just US$16,400 per tonne on Monday in response to a huge increase in supply from Indonesia, much of it from Chinese-owned and operated mines.

To see how this works, consider the diagram below, which represents the market for nickel. Before the increase in supply from Indonesian nickel mines, the supply was S0, and demand was D0. The equilibrium price of nickel was P0 (US$50,000), and the equilibrium quantity of nickel traded was Q0. The increase in the global supply of nickel to S1 decreased the equilibrium price to P1 (US$16,400), and increased the equilibrium quantity of nickel traded to Q1.

Should we be worried about this situation? Yellishetty clearly is:

Australia is a leading producer of critical minerals, supplying all ten of the elements needed for lithium-ion batteries, and has the advantage of better environmental, social, and governance (ESG) standards that make it an attractive destination for investment.

But it lacks the capacity to refine all of its own production, meaning it has to dispose of many of the critical minerals it extracts as byproducts...

Until Australia can find a way to break free of the market stranglehold of our biggest customer, those investments will remain at risk.

Australian nickel producers are now receiving a much lower price for their nickel. Clearly, that makes them worse off. Nickel is less profitable, and: 

On Thursday BHP wrote down the value of its West Australian nickel division Nickel West to zero and said it was considering placing the entire division into a “period of care and maintenance”.

Some Australian producers (like BHP) may shut down operations, albeit temporarily (in mining terminology, "care and maintenance" refers to a temporary closure).

However, the negative impact on Australian miners isn't the end of the story. Nickel consumers are clearly better off, because they are now buying more nickel (the equilibrium quantity has increased), and they are paying a lower price per tonne. Since nickel is an input into the production of a number of products, such as electric vehicle batteries, lower nickel prices lower the production costs of those products. That flows through into lower prices of the final products that include nickel as an input, meaning lower prices for electric vehicles and replacement batteries. [*] So, it's not all bad.

Some people may be concerned that the nickel profits are going to Chinese-owned mining firms. However, that concern would need to be weighed up against the fact that consumers (including Western consumers) will benefit from lower nickel prices. The Australian mines aren't going away completely, unless for some reason they lose the capability necessary to re-start production. If that were to happen, then maybe governments might decide to act, but not right now.

*****

[*] The relevant market diagram for the electric vehicle battery market is exactly the same as the one shown above. Lower costs of production lead to an increase in supply (because the supply curve shows the marginal costs of production, and lower costs shift that curve down and to the right), which decreases the equilibrium price and increases the equilibrium quantity of electric vehicle batteries.