Nickel is a metallic chemical element similar in form to chromium, aluminum and titanium, but is slow to react in air at normal temperatures and pressures. Nickel is magnetic and is valuable for the alloys it forms, especially many superalloys, and particularly stainless steel.
Thirty-eight percent of annual nickel use is in nonferrous alloys (or mixed with metals other than steel) and superalloys (metal mixtures designed to withstand extremely high temperatures and/or pressures, or to have high electrical conductivity). Nickel is used as a coating on other metals to slow down corrosion. Nickel coatings account for 14% of nickel use.
The remaining 6% of the annual nickel use is for a variety of purposes including the production of coins, nickel-cadmium and nickel-metal hydride batteries; as a catalyst for certain chemical reactions; and, as a colorant, nickel is added to glass to give it a green color. The U.S. 5-cent piece is called a "nickel" because it only contains 25% nickel.
Nickel, The Leader Of The Pack?
By Rudi Filapek-Vandyck, fnarena.com
In 2008, again, nickel fell first out of bed, others followed later. In November last year nickel started to waver. A few weeks later all commodities, from crude oil to sugar and soy beans, were facing sudden and sharp sell-offs.
This time around market watchers have observed how nickel has quietly outperformed the other base metals, as well as most other commodities. Last week, nickel managed to post a 4% gain when energy, other metals and especially most soft commodities recorded losses.
Could it be, some of these market watchers started to ask, that nickel is once again leading the rest of the pack? If this proves to be the case it would confirm the view from commodity bulls that prices should run higher into the second quarter on the back of more robust economic data, even though the shorter term might see continued price weakness.
History shows, however, that nickel has a far better track record to lead others into a downturn rather than pre-signalling another leg upwards. If anything, the case for nickel as a forward looking indicator appears to be "first in (the downturn), last out".
This, however, hasn't stopped market watchers suspecting that nickel might be leading the pack this time around. After all, 2010 was supposed to be the year of bulk commodities, crude oil, aluminium and copper, maybe of gold and platinum too, but nickel was seldom mentioned as a metal investors should have in their portfolio. Yet, three months into the new calendar year and nickel's performance to date is increasingly attracting investors' attention. So what's happening?
The first thing to note is that commodities as a group have de-coupled from various traditional links and relationships. Nickel certainly is no exception. Traditionally strong correlations between spot and futures prices and market indicators such as the Baltic freight indices, registered inventories in the US, Europe and more recently China, and the Chinese stockmarket (or Chinese power demand) have all declined since last year.
This indicates that investor sentiment and flow of funds have increasingly become a more important driver behind commodity prices. No surprise thus commodities -from energy to base metals, to precious metals, to agricultural products- more and more often seem to trade in tandem with global risk appetite. But even that relationship has now broken down with equities outperforming recently.
Even the formerly close correlation with Chinese demand has recently started to weaken. Observe, for instance, how Chinese demand for nickel has gradually declined over the past months (chart below), yet nickel has outperformed. As such, nickel's surprise performance deserves investors' attention as it signals a shift away from China as a leading indicator for industrial commodities (!).
The bull and bear cases for nickel's price outlook this year are -for once- not China-centric, they are based upon expectations for supply and demand elsewhere in the world. The bears will tell us overall demand outside China remains well below levels prior to the GFC, while demand in China is declining. In fact, there is anecdotal evidence of large inventories and of destocking in China, including for nickel.
The more bullish approach is that investors are anticipating the start of restocking in developed economies. Continued evidence of economic recovery, especially from the US, should therefore support commodity prices in the months ahead. Nobody is talking about another firm rally upwards, but as long as risk appetite remains high and economic data continue supporting a positive economic picture, the view is that commodities including crude oil, aluminium and nickel should break out of their trading range and see modest price rises between now and mid-year.
What is supporting the investment case for nickel is that supply is currently lagging market expectations due to union strikes at two nickel mines operated by Vale in Canada; Sudbury and Voisey's Bay. On top of this, there's also short term disruption at BHP Billiton's (BHP) Kwinana refinery in Western Australia. And there are persistent market rumours that Goro (another Vale project) in New Caledonia may simply never make it into successful production a la BHP's failed Ravensthorpe project in Australia.
Analysts at UBS argued earlier this month that falling inventories at the London Metals Exchange (LME) would signal that European steel manufactures were starting to restock again, and that this would be met by a positive response from investors. So far, both falling inventories and higher prices have happened.
UBS is among those who believe nickel is leading the larger base metals complex as it is a relatively small market (circa 10% the size of copper or aluminium) and thus more sensitive towards early stage changes.
Around the same time, colleagues at JP Morgan summed it up as follows: "The strength in nickel prices is a function of quite a few factors, including stronger stainless steel production output, tight nickel inventory levels of quality material and of material in the Americas generally, tight scrap markets, fairly downcast assumptions around mine supply in 2010 even though prices have rallied sharply and strong speculative demand."
An oft mentioned target for nickel prices is US$25,000/tonne. This marks the 61.8% retracement level from the big sell-off from US$35,000 to US$8850/t. Nickel this week managed to reach above US$23,000, but it subsequently retreated towards US$22,000/t.
Many an expert appears convinced nickel will reach for the US$25,000 target between now and mid-year.
Investors should note not everybody is equally convinced about nickel's price prospects over the longer term. Even bulls like UBS acknowledge there's plenty of potential excess supply around that can, and likely will be, re-activated in case of high nickel prices.
Witness, for instance, that UBS has similar average price forecasts for 2010, 2011 and 2012 and beyond: they are all around US$9.2/lb (or circa US$20,200/t).
