Nickel Increases As Supplies Dwindle
In the 1980 film, On the Nickel, the main character is a recovering alcoholic who has emerged from skid row.
Well, it just so happens that nickel itself is also rising from years of weak prices and is seeing a new life.
Since the beginning of this year, nickel prices have rallied over 50%, and look to continue the upward trend.
The biggest catalyst? Supply constraints.
Indonesia dominates the nickel market, accounting for approximately one-third of global ore production, and over 38% of refined metal. And as you’ll see, such a production concentration is becoming a major problem.
Prices Rally on Falling Inventories
Recall that, back in 2009, Indonesia banned exports of nickel ore. The country wanted to increase the value of its raw materials exports and encourage the establishment of domestic refineries and smelters.
In essence, it aimed to move its natural resources industries up the value chain.
At the time, the market’s reaction was one of indifference, since enforcement of the ban was lax, to say the least.
In January, however, the government stepped up its enforcement by banning exports of all mineral ores. This move not only proved that Indonesian resource nationalism is alive and well, but it also triggered an immediate spike in nickel prices.
And as I mentioned above, prices should only accelerate from here…
Caveat Emptor: From the Mine to the World Cup
According to Macquarie Group, the Indonesian export ban will remove about 450,000 metric tons of Indonesian nickel ore from the market – equivalent to 25% of global nickel use based on 2013 prices.
China has been Indonesia’s largest customer, importing 60 million metric tons of ore in 2013. With the ban, though, refined inventories in China will likely be depleted.
Same goes for inventories in global LME warehouses. This will result in a deficit by the end of the year.
Of course, global refiners will look to source ore elsewhere, but the unfortunate reality is that producers are unlikely to pick up the slack in production.
For example, Glencore (GLEN.L) revised down its production at its New Caledonia site. Vale’s (VALE) production is too small to make a difference. And even though Anglo American’s (AAL.L) facilities are running at full capacity, any incremental increase will be insufficient to meet global demand.
Adding fuel to the supply fire is the possibility of trade sanctions against Russia over the Ukraine invasion…
Russia isn’t only a large ore and refined metal exporter – it’s also a significant contributor to the scrap market, with scrap being a sizable nickel input. An estimated 80%-plus of stainless steel is recovered, making it one of the most recycled metals.
Simply put, even though mined nickel has seen steady production growth over the last number of years, all signs point to a supply crunch for the near future, something that will send prices higher.
Especially considering that nickel use is growing at about 4% each year – while use of nickel-containing stainless steel is growing at about 6%.
And in many of the applications for which nickel is used, there’s no substitute (without reducing performance or increasing cost).
Heck, the metal was even crucial to the 2014 FIFA World Cup, since nickel content in steel was used in all 12 sports stadiums in Brazil.
The good news is, as an investor, there are several ways to make money on the trend.
Investors are encouraged to take long futures positions on the London Metal Exchange or invest in the ETC markets – for example, the iPath Dow Jones-UBS Subindex Total Return ETN (JJN) or the iPath Pure Beta Nickel ETN (NINI).
Note that buying and rolling nickel futures beyond three months out on the forward curve is favorable, as the market is in backwardation.
At the same time, you could short steel producers like ArcelorMittal (MT) and Nippon Steel & Sumitomo Metal Corp. (NSSMY)… or stainless manufacturers, such as ThyssenKrupp Stainless (TKA.DE) and Outokumpu (OUTKY).
Whatever you do, just be mindful of political and economic strife in Indonesia and Russia.