Brother, Can You Spare a Nickel?
by Tony Daltorio, Investment U Research
Wednesday, May 12, 2010
If you lived through the Great Depression, you'd likely remember the song: "Brother, Can You Spare a Dime?"
These days, commodity investors are singing a slightly different tune: "Brother, Can You Spare a Nickel." And they're singing it for very different reasons.
You see, the value of the metal in a U.S. 5-cent coin now stands at 6.2 cents.
Nickel has jumped about 45% since the start of 2010, while copper and aluminum have risen merely 5%. And since its low point in late 2008, the commodity's price has more than tripled to $27,500 a ton thanks to strong demand from the stainless steel industry along with supply disruptions.
This year's upswing will have a significant impact on mining companies such as Brazil's Vale ADR (NYSE: VALE) and Russia's Norilsk Nickel ADR (OTC: NILSY), the world's largest nickel producer. Together, those two companies account for about a third of the entire market.
On the down side, stainless steel producers such as ArcelorMittal ADR (NYSE: MT) and Allegheny Technologies (NYSE: ATI) have to eat a good amount of that, since the cost of nickel makes up as much as 60% of the final cost of their product.
And the situation gets even more dicey the deeper you dig.
The Fundamentals Behind Soaring Nickel Prices
Most industry insiders believe supply and demand fundamentals are propelling nickel prices. They think it could easily surpass $30,000 a ton in the near future as demand outstrips supply.
On the one hand, global stainless steel production rebounded towards its highest level last quarter at 7.8 million tons. Since stainless steel mills account for over two-thirds of nickel demand, that makes an obvious difference. And veteran nickel/stainless steel researcher Heinz Pariser expects those mills to produce 30.5 million tons of steel this year; a 16% increase from 2009.
It should come as no surprise that China factors into that uptick. The world's largest stainless producer, the country also consumes the most nickel, accounting for 30% of global demand.
But that two-edged sword swings both ways.
Chinese mills are running at historical high rates to meet those orders. Some of the larger companies can't even fulfill their customers' requests for this quarter.
In describing the stainless steel industry's demand for nickel, one trader aptly said, "Whenever [nickel sellers] get an order to buy nickel, [the steelmakers] want it yesterday."
Supply constraints have only exacerbated that strong demand. A long-running strike at Vale's Canadian operations, and production disruptions at BHP Billiton ADR (NYSE: BHP)'s western Australian operations, have both taken their toll.
And then there's the upcoming closure of the Dudinka port in northern Siberia, where Norilsk ships its nickel exports.
The port closes each June during the so-called melt season, so Norilsk usually pre-ships its orders to cover that period. But it might not have enough production to fulfill all of its orders ahead of time this year.
Speculation About Nickel... One Way or the Other
Nickel's sharp rise has also sparked the interest of financial speculators, inspiring comparisons with 2007. Back then, prices rose above $50,000 amid allegations of market manipulation.
These days, traders once again watch the industry nervously.
In particular, they're concentrating on the London Metal Exchange (LME). It shows that one company recently acquired more than 50% of nickel warrants, which offer a measure of control over the LME's warehoused goods.
But that large position is one reason why the bears in the market believe nickel's glory days may be short-lived. They're comparing the situation to years past as well, but point to the 2007-2008 debacle when prices crashed.
In addition, they expect production at Vale's Canadian facilities - which accounts for about 10% of global output - to return in the second half of 2010. In addition, future supplies are set to pick up with a wave of new mine production set to come on stream next year.
That hoped-for surge could provide some relief to the U.S. Mint by bringing the cost of a nickel in line with its face value. Then again, it might not.
But one way or the other, both bulls and bears can participate in the market through an exchange-traded note (ETN) from iPath: Dow Jones-UBS Nickel Subindex Total Return (NYSE: JJN).