Squeezing Nickel Till It Screams
A Note From the Editorial Director: Sean's report this week makes me nervous. It's the kind of information we would normally reserve for subscribers of his newsletter, Oxford Resource Explorer. But because you haven't yet had the chance to see the newsletter - the first issue won't be released until next week - we're making an exception... just this once.
The price of nickel touched a three-week high this week. The short-term trend is up. The bigger trend is even higher. And you can potentially make a boatload of dollars on nickel.
The reason: Nickel faces supply problems, starting in mineral-rich Indonesia.
On January 12, Indonesia imposed an export ban on raw mineral ores. The intent is to force companies to build smelters on Indonesian soil. This affects all sorts of minerals. The list includes copper, iron, lead, zinc, chromium, tin, gold, silver and bauxite.
But it especially affects nickel.
Why? Because Indonesia supplies 20% to 25% of the world's nickel, most of it as raw ore, and there aren't many nickel smelters there.
So we could see nearly a fourth of the world's nickel supply shut off.
Mark Selby, vice president of Royal Nickel (TSX: RNX), explains, "This is the equivalent to all of the OPEC Gulf states ceasing oil production."
In China, producers of "nickel pig iron" - a lower-grade substitute that nevertheless includes some real nickel - imported more than 30 million metric tons of nickel ore from Indonesia last year.
"And the export ban will also severely impact nickel producers in Ukraine, Australia and Japan," Selby says.
Sure, there are stockpiles of nickel. And those stockpiles were built in anticipation of the ban. But they will deplete rapidly. If the ban is strictly enforced, Selby says, the world could enter a severe nickel shortage in as little as 12 months.
It doesn't help that Indonesia issued its export ban without written guidelines. Some miners halted operations while they tried to sort things out.
Indonesia is causing this chaos because it wants miners to build smelters on its soil to process ore. That would create local jobs.
But the small, private operators that do most of the mining in Indonesia can't afford to build smelters. So this is actually going to cost jobs... a lot of jobs.
But Indonesia's loss could be your gain. The potential for investors to profit from this government-caused nickel shortage is clear.
How You Could Win Big
Maybe Indonesia's politicians will wise up. After all, this entire crisis could go away with the stroke of a pen. But in case they stay stubbornly stupid - and nobody's stubbornly stupid like politicians - there are several ways you can profit.
- The iPath DJ-UBS Nickel TR Sub-Index ETN (NYSE: JJN) tracks the physical metal. It has very light volume, so think twice before you buy it, and use a limit order if you do.
- The ISE Global Platinum Index Fund (NYSE: PLTM) is weighted nearly 9% to OAO GMK Norilsk Nickel, a Russian company that is the world's largest producer of nickel. Again, volume is very light. Be very careful.
For my money, some great nickel miners are in Canada. After all, Canada is one of the world's top five nickel-producing countries, and you avoid the political risk that is ruining other parts of the world. Vale SA (NYSE: VALE), the second-biggest mining company in the world, owns seven nickel mines in Canada.
Other nickel miners that might benefit if prices spike include First Quantum Minerals (TSX: FM), Lundin Mining (TSX: LUN), Royal Nickel (TSX: RNX) and PolyMet (NYSE: PLM). I'm not recommending any of these companies or funds today. Just citing places to start as you conduct your own due diligence.