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Nickel Roller Coaster Ride Over

The price of nickel, which is used in the making of stainless steel, has been on a roller coaster ride in 2014.

First, a ban on ore exports from Indonesia and fears of sanctions against Russia drove prices from a five-year low of around $14,000 per metric ton (mt) to over $20,000 per mt.

Then the market skidded, nearly wiping out the entire gain as traders took into account massive global inventories of the metal and increased nickel ore exports from the Philippines.

Now, nickel prices are on the rebound again… and for good reasons.

The metal’s prices should be reaching new heights in the months ahead, opening the door for investors to profit.

Chinese Inventories Gone?

Most of the factors behind nickel’s potential rise come from China.

A report from the respected publication Shanghai Metals Market – the leading provider of metals information in the country – said there was a high likelihood that nickel ore inventories at five of China’s major ports will be gone by April 2015.

The metal stored at the ports accounts for 70% of the country’s inventory!

Secondly, Chinese output of a cheap alternative to nickel ore, nickel pig iron, is being sharply curtailed by the government. The crackdown is due to its newfound seriousness about pollution.

Nickel pig iron accounts for 25% of the global refined nickel supply. It’s expected that 70,000 mt of the annual pig iron production will end in China.

Against this backdrop of restrained supplies, there’s increased demand for nickel thanks to higher production levels of stainless steel across the globe. Stainless steel accounts for 65% of all refined nickel demand worldwide.

In the world’s two biggest economies, stainless steel production is rather robust in 2014. In China, stainless steel output was up 17% in the first half of this year, while even in the United States, stainless steel output during the same period was up 16%.

Brazil’s Vale a Timely Investment

How can investors play what looks like a sustained rebound in nickel?

Probably the best bet is Brazil’s Vale S.A. (VALE).

This company is best known as an iron ore powerhouse, but it’s becoming a major player in nickel, too.

In its latest quarterly report, Vale stated that nickel output rose by nearly 17% over the prior quarter to 72,100 mt. That took total production to 201,400 mt this year.

Vale forecast that its overall nickel output this year would hit 289,000 mt. That’s higher than Russia’s Norilsk Nickel (NILSY), the former nickel-producing champ, which produced 230,000 mt this year.

For value players, this may be the perfect time to buy Vale. Well-known players, like Jim Chanos, are now closing out some of their shorts. Chanos said that Brazil was his No. 1 short in 2014, and that Vale was definitely on his list.

The stock is beaten down by both lower iron ore prices and the result of the Brazilian election, which market-unfriendly incumbent Dilma Rousseff won.

In the past, key elections like this one have traditionally marked a turning point in sentiment, even when they have unfriendly results. And since the election result was so close, Rousseff may become a bit less anti-business.

One key indication of that will be the new finance minister for Brazil. Naming a market-friendly candidate, such as Vale’s CEO Murilo Ferreira or former central banker Henrique Meirelles, plus stimulus measures for the economy, will give the stock market a boost.

And since Vale is one of the stock market’s biggest components, it would benefit.

And “the chase” continues,

Tim Maverick

Tim Maverick

, Senior Correspondent

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