- I’ll describe the nickel supply and demand environment, which is now getting interesting.
- This also creates an interesting risk reward investment situation.
In the last two years, you’ve seen me be extremely bullish on copper and zinc. In the last year and a half, copper prices are up more than 50% while zinc prices are up more than 100%. Was my past analysis just a lucky guess or real knowledge? If there had been a global recession, I would have been dead wrong but there was a significant probability that both metals would rise and I was able to see that because investing in commodities is relatively easy.
There are only a few things you have to look at when considering an investment in commodities: demand and supply trends, current sentiment, and you have to compare the price of the commodity to the mining or production costs. If prices are below mining costs, supply will slowly remove itself and create another deficit, and vice versa when prices are high.
However, now that copper and zinc are much riskier than they were two years ago, I have found another metal with a still subdued price and in today’s article, I will analyze the risks and rewards of it. The metal is nickel.
For those of you who read my article on Nickel from July, I will provide an update here and a more focused view of what we can expect in 2018. The other article was more focused on the long term and expected higher demand coming from battery production.
Nickel prices today are $5.72 per pound, or $12,657 per metric ton. This is a bit higher than the lows of $3.95 reached in 2016 and 2017, but it’s still much lower than the highs of $20 reached in 2007, and above $10 reached in 2011.
The reason behind the subdued nickel prices is overproduction. The extremely high prices in 2007 and 2011 increased the attractiveness of nickel, but as the product is mostly mined as a co-product, usually with copper, it always pays to produce it no matter the market price. This has created huge global inventories which keeps the price low.
The thing with nickel is that only 30% of producers are price sensitive which means that the remaining 70% will simply keep producing no matter the price.
Therefore, the short-term outlook isn’t that positive for nickel. There are supply deficits, but the huge inventories cover for that.
However, low prices don’t incentivize increased production and the current deficits are going to deplete global inventories so that in 2022, nickel prices will have to be much higher than they are now.
In addition to the expected increased deficits, there is much more potential upside for nickel in the form of increased demand coming from increased usage in steel production, especially in India, and from increased demand for batteries.
Nickel is one of the most used metals in batteries and therefore if the world really turns green with electric vehicles, solar panels, and renewable electricity storage, there can really be much higher demand for nickel as currently 60% of nickel demand comes from the steel industry. UBS estimates that nickel demand will be higher by 15% to 40% thanks to electric cars.
Another important thing to mention is that high quality nickel is what will be needed as it simply isn’t that cost efficient to convert low grade nickel ores into nickel.
So we have an environment where we know there is upside but that upside will happen somewhere in the next 3 to 5 years. Should you invest in nickel now, and if so, how should you do it?
Investing In Nickel
The first good thing about nickel is that it is relatively cheap and the downside is limited. In the case of a global economic slowdown, I wouldn’t be surprised to see copper prices down to $2 again, at least for a short period of time. But the situation is relatively stable for nickel as it would be highly unlikely to see it go below $4 per pound.
So you have an investing situation where the downside is limited while the upside shows strong structural long-term positives. The best way to invest in such an environment is to find stocks that are good investments at current nickel prices and that will become great investments at higher nickel prices.
The problem with nickel miners is that they typically aren’t just nickel miners. For example, the two largest global nickel producers, Vale (NYSE: VALE) and Norilsk (OTC: NILSY), have most of their revenue come from iron ore with Vale, and copper and palladium with Norilsk. Similarly, Glencore (OTC: GLCNF) is mining a whole bunch of other metals while nickel isn’t that significant for BHP (NYSE: BHP). Nevertheless, gaining exposure to nickel through a big miner seems the right thing to do as junior miners seem simply too risky with questionable development projects that may or may not work.