Shine could be returning to nickel

Published on: June 22, 2017

Market pundits occasionally warn investors to avoid picking up nickels in front of steamrollers — alluding to potential unforeseen market danger for little reward. This time, though, it might be worth the risk. Following a long bear market that has developed for nickel, there are reasons for prices to bounce back.

Certainly, nickel looks cheap. It has halved in price since a peak in 2014. True, there are plenty of negatives out there. Supply growth from smelters in China and Indonesia has yet to abate. Forced destocking from end users and traders has made matters worse. Goldman Sachs expects net supply growth will nearly triple in 2018 from the estimated 37,000 tonnes this year.

Nickel trades at about $4 per pound on a spot basis. At that price, 40 per cent of world nickel output loses money, according to RBC. And that comes before considering the added capital costs for mines and processing plants.

But what looks like a disaster may in fact prove a buying opportunity if supply can be curtailed. For one thing, making anything at a loss is not sustainable. For another, Chinese makers use a polluting process involving sticking cheap imported pig iron into blast furnaces to separate out the nickel. Given China’s move to crack down on environmental hazards, Beijing may eventually stop this.

Nickel demand is admittedly not super strong but it has promise. Again much depends on China, responsible for more than half of all consumption. Chinese demand should grow 6 per cent annually over the next two years, according to Goldman Sachs. Also, nickel demand from battery makers could take up some slack if projections of rapid growth of electric cars prove accurate.

Contrarian investors should consider which nickel producers have the most exposure. The biggest miners, such as Vale and Glencore, have less direct exposure to the metal. The world’s largest producer is Russia’s Norilsk Nickel, which makes about a third of revenues from the rust-proofing metal. Canada’s lossmaking Sherritt and France’s Eramet heavily depend on nickel, too.

Though nickel’s reputation with investors may have been tarnished in recent years, prices cannot fall forever without a supply response in the months ahead.


Industrial Metals Macro Nickel