Nickel ETFs Rally On Russian Concerns and Indonesia Ban [iPath Dow Jones UBS Nickel Subindex Total Return ETN]

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May 2, 2014 9:32am NYSE:JJN NYSE:NINI

Nickel ETNWhile 2014 brought bad news for broad stock markets thanks to uneasiness over the QE taper and the resultant emerging markets concerns, geo-political issues and over valuation in stock markets,

it rewarded natural resource investing with a flurry of good news.

Many commodities saw a decent start this year, with metals increasing year-to-date. Among the metals, nickel witnessed the highest gain among the six main metals traded on the London Metal Exchange (LME).

Nickel has started the year 2014 with a bang rising about 31%. Commotion in supplies which originated from geo-political tension in Russia, as well as an Indonesian export ban, were the main reasons for its outperformance.  Thanks to this, nickel price for delivery in three months peaked to the 14-month high on the LME in recent trading.

Reason Behind the Surge

First in January, nickel gained after Indonesia enforced a ban on unprocessed mineral ore shipments, effective January 12. Notably, Indonesia is the world’s biggest producer and exporter of nickel, and accounts for about 20% of global supply. Analysts commented that this ban alone will shift the nickel market from an oversupply situation (currently) to deficit situation over the coming years.

It has been over three months; Indonesia has not permitted any nickel ore exports. In early April, inventory supervised by the London Metal Exchange witnessed the biggest weekly drop since June 2012 (read: 3 Commodity ETFs Still Looking Strong).

Also, Russia – which takes the second position in terms of nickel product – has been in the news this year thanks to its annexation in Crimea and the resultant stand-off with the West. Now that Russia is again arguably venturing into Ukraine’s other territories, further protest from the West is likely to result in sanctions against Russian’s nickel exports (among other goods).

Together, the two nations satisfy more than a third of world nickel requirement thus a threat to supplies is pushing the prices higher. Moreover, with global growth remaining more-or-less on track, use of stainless and non-stainless products has been on the rise. About two-thirds of nickel is used in the making of stainless steel which in turn is giving another round of support to nickel prices.

Market Impact

Amid such fundamentals, nickel ETFs got their days back. Currently, there are two ETNs available in this space, and both are performing quite well and could be in focus in the days ahead.

iPath Dow Jones-UBS Nickel Subindex Total Return (NYSEARCA:JJN)

This ETN tracks the Dow Jones-UBS Nickel Subindex Total Return. The index delivers returns through an unleveraged investment in the futures contracts on nickel and currently consists of one futures contract on the commodity.

The product is a bit expensive as it charges 75 bps in fees per year. It trades in a paltry volume of nearly 7,000 shares on average daily basis that increases the trading cost in the form of a wide bid/ask spread.

The fund was once unpopular but is slowing gaining popularity this year. Presently it has amassed about $8.4 million in assets. The note is up over 31% year-to-date. JJN currently has a Zacks ETF Rank of 2 or Buy rating with a high risk outlook (read: Why Nickel ETFs Might Be a Great 2014 Investment).

iPath Pure Beta Nickel ETN (NYSEARCA:NINI)

This note looks to track the performance of the Barclays Capital Nickel Pure Beta Total Return Index. Unlike many commodity indexes, this product can roll into one of a number of futures contracts with varying expiration dates, as selected, using the Barclays Pure Beta Series 2 Methodology.

This approach might result in less contango, which could prove crucial, as shifting from month to month in contracts can eat away at returns during an unfavorable market situation.

Further, the ETN manages about $7.0 million in its asset base and sees light volume of less than 9,000 shares a day, suggesting a wide bid/ask spread. It charges an annual fee of 75 bps per year. This fund too has added about 30% in the year-to-date time frame and is still surging. NINI currently has a Zacks ETF Rank of 2 or Buy rating with a high risk outlook.

Bottom Line

Though things will take a sharp turn if Indonesia lifts the ban or tensions between Russia and Ukraine cools down, but industry experts believe that the situation is less likely to change at least on the Indonesian front. So, the metal may be poised for a bigger rally.

Though both the ETFs have presently moved into overbought position, short-term moving averages for the products are higher than the long-term averages. In fact, the current prices for the products are also higher than the Parabolic SAR indicators thus giving clear bullish signals for the notes, suggesting that more strength might be ahead for this commodity in the weeks ahead.

This article is brought to you courtesy of Eric Dutram.

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