The Nickel Supply Squeeze Is Just Getting Started [Freeport-McMoRan Copper & Gold Inc., Glencore PLC, BHP Billiton Limited]

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May 30, 2014 10:46am NYSE:JJN

Nickel ETNBack in January, I wrote a column explaining the supply-demand squeeze in nickel. One way I suggested to play the nickel squeeze, the iPath Dow Jones UBS Nickel Subindex Total Return ETN(NYSEARCA:JJN), is up 38% from


my recommendation.

Did you buy that fund? Well, if you didn’t, there’s no need to kick yourself.

The nickel run isn’t over.

In fact, if anything, the supply/demand squeeze powering nickel’s surge is likely to get stronger.

The biggest user of nickel is China. Nickel is used to make stainless steel, and China makes a lot of it. Stockpiles of nickel in China are falling. According to Deutsche Bank, China’s nickel stockpile is now down to one month’s supply, a drop of 26% in just a month.

A big supply crunch is coming for China.

What’s more, the global nickel market will swing to a deficit of 132,200 tons next year from a surplus of 13,800 tons this year, according to Citigroup.

What will that do to prices? The price of nickel was recently $8.91 per pound, or $19,615 per metric ton. Citi forecasts nickel prices to rise to more than $30,000 per metric ton next year. That’s a rise of more than 50%!

The Source of the Problem

Indonesia’s ban on nickel ore exports has removed close to a third of the world’s supply. Indonesia’s raw nickel exports have gone to zero. Everybody thought there would be relief to this thanks to an election in April, but that didn’t work out.

Now Indonesia says it is furiously building nickel smelters to fix the supply crunch. And that’s a good idea, except for one thing: power.

The government is talking up the number of planned smelters. Two ferronickel and seven nickel-pig-iron smelters should be completed this year, according to the Energy and Mineral Resources Ministry.

What’s more, the ministry says as many as 63 smelters may be built by 2017, including 40 nickel plants, 10 iron ore smelters and four copper-cathode smelters.

However, many of these mines are scattered over Indonesia’s 17,000 islands. How are they going to get power to all those new smelters?

I’ll tell you how: They won’t. The whole thing is pie in the sky.

According to an analysis from Standard & Poor’s, smelters at new mines are horribly expensive and a drag on profitability.

“For a greenfield nickel smelter to be economical, capacity must be at least 10,000 or 15,000 tons of contained nickel per year,” the S&P report said. “Such a smelter would require several hundred megawatts of electricity capacity and more than $1 billion in investment.”

So maybe the Chinese will pony up money for the smelters. Are they going to pay for a power grid that can connect to outlying islands, too?

The Government Doesn’t Care

Do you think any of this worries the Indonesian government? Ha!

Sure, lack of supply will put upward pressure on nickel prices. And nickel miners are being thrown out of work. But the fact is, the Indonesian government really doesn’t care.

That’s because it taxes finished nickel exports, and as the price of nickel goes higher, the taxes it collects will more than make up for what it formerly collected on nickel ore.

So why would the Indonesian government solve a problem that puts more money in its pockets?

Meanwhile, the price of nickel is going up and up and up.

Good investing,

by Sean Brodrick, Resource Strategist

Investment U provides cutting-edge research and strategic financial recommendations for all levels of investors through its morning publication Investment U Daily and its related publications.

Related: Freeport-McMoRan Copper & Gold Inc.(NYSE:FCX), Glencore PLC(LON:GLEN), BHP Billiton Limited(ASX:BHP)


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