The Secret That’s Driving This Industrial Metal

Sean Brodrick By Sean Brodrick,

Metals

Last year was very shiny for nickel. The metal’s price rose about 15%. What does 2017 hold? The easiest path for this industrial metal is higher… but not for the reasons you think.

Most people think of nickel as the U.S. five-cent piece. Actually, those coins are only 25% nickel. The rest is copper. What’s more, the value of the metal in a nickel is now about $0.07!

It’s so bad that in December of last year, the U.S. Mint banned the melting or exporting of nickels. It also forbade the exporting of pennies. Because, you guessed it, the metal in a penny is worth more than $0.01. Here’s another brain squeezer: Pennies are only 2.5% copper; they’re 97.5% zinc!

I’m in danger of being distracted by copper – another shiny object – so let’s get back to nickel.

Foreign Suppliers

Here’s the thing. The last time I wrote about base metals, they were all charging higher. Nickel got a boost from demand, but also pinched supply.

The Philippines accounts for about a fourth of global nickel supply. In 2016, up to 30 nickel mines were suspended. The government cracked down due to what it deemed “irresponsible mining.”

Then at the end of the year, nickel hit the skids for a bunch of reasons. It’s still up about 8% from where it started in 2016. But recently, many folks wanted to stick a galvanized fork in nickel and call it done.

The problem is Indonesia. That country is another big source of nickel. It has an on-again, off-again, love-hate relationship with the mining industry. In 2014, Indonesia placed a ban on exports of nickel ore. Like Uncle Sam, it saw value in keeping the product at home.

What Indonesia wanted was for companies to process the ore in Indonesia, then ship the refined metal. But a lack of refineries threw a wrench in the works. So Chinese companies worked overtime to build nickel smelters in Indonesia.

Why does China care? Because Chinese stainless steel production reached 24.79 million metric tons in 2016. That’s an increase of 11.87% year over year. And you can’t make stainless steel without nickel.

A couple weeks ago, Indonesia announced it was lifting its ban on exports. More supply puts pressure on prices. That’s why nickel prices are under pressure.

But I believe Indonesia is shooting itself in the foot. While dangling the carrot of lifting the export ban, the government whacked miners with a big stick. It passed new rules requiring miners to divest 51% interest in mining projects to local investors.

The sale can take place over a 10-year period. But still, we won’t see new investment dollars stampeding into Indonesian mines.

Then, even more recently, the Philippines pulled the rug out from under nickel bears.

On February 2, that country ordered the closure of 23 mines for environmental reasons.

The majority of those mines are nickel producers. About half of the country’s nickel production will be affected. Manila also suspended the country’s top gold mine.

So that put a fire under nickel prices again. What a roller coaster!

It’s a crazy world, so we’ll probably get another pullback.

I believe any pullback in nickel is a heck of a buying opportunity.

For one thing, Chinese nickel stockpiles are low. Chinese manufacture of stainless steel is rolling along. And China’s economy is growing. In fact, that country’s manufacturing sector recorded the fastest expansion in four years in December.

“Depletion Point”

According to Wood Mackenzie, a global consultancy specializing in natural resources, nickel’s rise will continue in the first half of 2017. And that’s because ore stocks in China will approach a “depletion point” in March/April.

Wood Mackenzie specifically says China’s stainless steel manufacturing is going to eat up nickel supply.

And it’s not just China. Eurozone manufacturing data in December hit its highest level since April 2011. At the same time, an index of U.S. manufacturing activity rose to 54.3 in December from 54.1 in November. That’s the strongest since March of 2015.

That’s a heck of a lot of stainless steel manufacturing around the globe. And that increases nickel demand.

The International Nickel Study Group expects that global nickel demand will rise about 5.5% in 2017. And new supply will have a tough time keeping up.

It’s not just stainless steel, either. The NSG says nickel demand “will maintain a positive trend in the aerospace industry and in the battery sector.”

You’ll Get a Charge Out of This

Ah-ha! Now we’re getting to what I hinted at the start of this story. Nickel isn’t just for stainless steel. It’s also used in lithium batteries. In fact, battery demand for nickel rose a stunning 20% in 2016, according to Glencore, a huge mining company.

Have you seen the trend in lithium batteries? The compound annual growth rate for lithium-ion batteries between now and 2025 is projected to be 14%!

This demand is what juiced nickel demand in 2016. That’s why there was a supply-demand gap of 67,000 metric tons. That had to be made up from stockpiles. This year, analysts at Macquarie expect the global nickel deficit to increase to 93,000 metric tons.

There are some good ways to play this. You could buy a nickel miner. The last time I wrote about base metals, I talked about the PowerShares DB Base Metals ETF (NYSE: DBB). Unfortunately, that fund invests in copper, zinc and aluminum – the three other base metals I talked about last time.

For more primary exposure to nickel, you should look at the iPath Bloomberg Nickel ETN (NYSE: JJN). It tracks the Bloomberg Nickel Subindex Total Return and has an expense ratio of 0.75%.

Volume is light. It averages 18,600 shares per day, sometimes a lot less. So anyone buying it shouldn’t buy a lot at once and shouldn’t chase it.

The outlook for metal prices is bullish this year. The World Bank says that, as a group, metals should rise 11% in 2017. Some will outperform. And nickel has the potential to be one of them.

Good investing,

Sean