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Nickel shows signs of life as Chinese inventories dry up, and memories of Musk's intervention linger

Nickel is used in stainless steel and in electric vehicle batteries

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A drop in nickel output from major mining projects in the Philippines has helped cut Chinese nickel inventories down to two year lows and, in the process, helped to drive prices up to nine month highs.

Nickel as a metal has struggled to gain traction in the market this summer as uncertainties around stainless steel demand from China have thus far kept a lid on the price.

Even a surprising intervention from Tesla (NASDAQ:TSLA) chief Elon Musk last month failed to light a fire under the price.

But if the Chinese are growing short of it, that could make all the difference in the near term. The price moved up to US$6.74 per pound this week, a long way above the lows hit in March of around US$5.00.

Global mined nickel fell 7.7% in June compared to the amount mined in the corresponding month last year, according to the International Nickel Study Group, which monitors the markets.

That production rate still marks a significant improvement from the sharp comparative falls witnessed in the market in April and May. Nevertheless, year-to-date production has fallen by more than 10% to 1.1 million tonnes as coronavirus shut-downs have come into effect.

Production from the Philippines is down by 28%, production from Canada is down by 19%, and production from Indonesia by 11%.

And, at the same time, as Chinese stimulus money continues to filter through into new infrastructure spending, demand could rise significantly. It’s that potential tightening of the market that’s beginning to move the price, underpinned by longer-term hopes for demand such as that highlighted by Mr Musk.

The lithium ion batteries that go into Tesla cars are actually primarily composed of nickel, to the point that each Model 3 contains around 30 kilogrammes of the metal. It in the nickel that the energy is actually stored, and the more nickel a battery contains, the higher the energy density of the battery.

Musk is keen to see nickel mined in a sustainable and ethical way, and has allowed something of a spotlight to be shone on waste-dumping techniques employed in Indonesia and elsewhere.

It also allows newer entrants into the market an opportunity to shine. Shares in Horizonte Minerals (LON:HZM), for example, have strengthened in recent weeks as the company has moved towards financing a new mine in Brazil. Other companies that could also benefit from significant re-ratings on the back of a renewed strength of the nickel price include like Amur Minerals (LON:AMC), Corcel (LON:CRCL), Spruce Ridge Resources (CVE:SHL), Canada Nickel Corporation (CVE:CNC), ALX Resources (CVE:AL), Midland Exploration (CVE:MD), Talon Metals (TSE:TLO)(US-OTC:TLOFF), and Palladium One Mining (CVE:PDM).

Majors like Rio Tinto (LON:RIO), Glencore (LON:GLEN), Vale (NYSE:VALE) and Norilsk (MCX:GMKN) are already well ensconced in this space, and have recently been showing a renewed appetite to do deals with smaller companies.

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