Back in March, I told Wall Street Daily readers that the stars were aligned for a nickel bull market.
Sure enough, nickel became a commodities standout this year. It’s up about 40% so far in 2014 at $19,400 per metric ton.
The reason behind the rise was a ban on raw nickel ore exports from Indonesia – the world’s top supplier of high-grade nickel ore.
Now the world’s second-largest producer of raw nickel ore, the Philippines, may be following suit.
On top of that, China, a huge consumer of nickel and a major customer of the Philippines, is running low on its once-vast stores of iron ore. This means that the Chinese will be looking to buy nickel from other sources soon.
With these two factors looming on the horizon, the market is sure to swing into a deficit in 2015.
Cutting Off China
With Indonesia out of the picture, the Philippines has become a key cog in the Chinese industrial machine, supplying 98% (that’s five million metric tons) of China’s nickel ore imports.
The raw nickel produced by both of these countries is much cheaper than the refined product produced by the other major providers.
Nickel is also crucial for making stainless steel and thus an essential commodity for China. In 2014, exports of raw nickel ore to China tripled and now make up 61% of China’s total nickel ore imports.
But this export tidal wave is going to crash on an immovable political shoreline.
The Philippines is now considering imposing a ban on raw ore exports – just like Indonesia.
A senator in the country’s legislature introduced the bill to stop exports of unprocessed ores.
Unsurprisingly, the bill gained immediate support from the Philippines’ environment minister, as many nickel mines in the country have been closed recently due to environmental breaches.
The Philippine government is also rumored to be raising mineral export taxes.
General market speculation is that the Philippines won’t implement the export ban for a very long time. But my personal opinion is that the country will do so within a year.
If the Philippines follows through on these measures, it’s very possible to see $25,000 or even $30,000 per ton of iron ore in 2015.
Riding the Wave
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These developments bode well for anyone investing in nickel, such as through the iPath Dow Jones-UBS Nickel Subindex Total Return ETN (JJN). This exchange-traded note is designed to track the movements of nickel prices.
An even better opportunity would be stocks from the world’s two largest producers of refined nickel…
The first is Brazil’s Vale S.A. (VALE), which bought nickel giant Inco a number of years ago.
Yes, it’s weighed down by the overproduction of iron ore and falling prices in that market. But the company will benefit from higher nickel prices.
Vale is also very close to making a deal with Glencore PLC (GLNCY) to combine their vast, adjacent nickel operations in Canada. Such a move would result in more than $1 billion in cost savings.
The second and probably the best choice is the world’s largest miner of nickel (and palladium), Russia’s Norilsk Nickel (NILSY). It’s rumored that company was the instigator behind Indonesia’s policy change earlier this year.
Sure, it’s a Russian company and there’s a ton of turmoil in that part of the world right now.
But fundamentals have allowed Norilsk’s stock to soar this year. Its profits tripled in the first half of 2014, propelling its stock to a 27% gain.
A Philippine ban on nickel ore would only add to Norilsk’s bounty.
And “the chase” continues,