Seeking Alpha
Profile| Send Message| ()  

By Michael Johnston

Nickel is one of the oldest known metals, with uses tracing back more than 5,000 years. Historically, nickel has been often confused with silver thanks to its physical appearance. The metal, first classified as a chemical element in the 18th century, is used widely today. While perhaps the best-known use of nickel is in U.S. currency, the metal has a handful of additional applications as well.

Nickel deposits are heavily concentrated in a few areas of the world, including Canada and Russia. The metal has appeal as an investable asset because of its use in steel, making nickel a way to gain exposure to the global manufacturing industry. There are a number of ways for investors to gain exposure to nickel, including exchange-traded products.

Physical Properties and Uses of Nickel

Because nickel is resistant to corrosion, it has appeal for use in a variety of industrial applications. Nickel is used in many alloys and as a plating to currencies and other products. Nickel is also one of only a handful of elements that remain ferromagnetic in moderate temperatures, and as such is used in magnets as well (iron, cobalt, and gadolinium maintain similar qualities).

Nickel is perhaps best known as a component of the five-cent piece of U.S. currency; the nickel coin is made from 75% copper and 25% nickel. That coin contains 0.04 ounces of nickel, which at one point was worth more than five cents. There are now laws in place that prohibit arbitrageurs from melting down nickels into its raw form.

Nickel is used in a number of consumer and industrial products, including stainless steel, guitar strings, batteries, and magnets. About 60% of nickel is used in the production of nickel steels, while 14% is used in nickel-copper alloys. The metals also has uses in plant biology and can also be used in electrical resistance alloys.

Nickel Supply and Demand

Nickel is mined from naturally occurring ore deposits. Unlike some metal commodities, the global supply of nickel is concentrated in a handful of regions of the world. Major production sites include the Sudbury region in Ontario and Norilsk in Russia. The Sudbury region of Canada accounts for about 30% of the world’s nickel supply, while the Norilsk deposit in Siberia is home to about 40% of global proven reserves.

Other sources of nickel ore include France, Australia, Cuba, and Indonesia. Nickel reserves in the U.S. are minimal; a mine in Oregon was a significant source of the metal, but closed down in the late 1980s. The U.S. did not have any active nickel mines in 2010, though limited amounts of nickel were produced as a byproduct of mining for platinum and palladium in the western U.S. (all data below is in metric tons)

Country 2009 Production 2010 Production Reserves
U.S.
Australia 165,000 139,000 24,000,000
Botswana 28,600 32,400 490,000
Brazil 54,100 66,200 8,700,000
Canada 137,000 155,000 3,800,000
China 79,400 77,000 3,000,000
Colombia 72,000 70,200 1,600,000
Cuba 67,300 74,000 5,500,000
Dominican Republic 3,100 960,000
Indonesia 203,000 232,000 3,900,000
Madagascar 7,500 1,300,000
New Caledonia 92,800 138,000 7,100,000
Philippines 137,000 156,000 1,100,000
Russia 262,000 265,000 6,000,000
South Africa 34,600 41,800 3,700,000
Venezuela 13,200 14,300 490,000
Other Countries 51,700 77,800 4,500,000
Global Total 1,400,000 1,550,000 76,000,000
Source: USGS

Interestingly enough, scientists believe that most of the nickel is concentrated in the Earth’s core, far out of reach of most miners.

Nickel Price Drivers

The price of nickel has varied significantly over the last several decades, and the metal can exhibit significant volatility. There are a number of factors that can impact the price of nickel, several of which are outlined below:

  • Economic Outlook: Because a major use of nickel is the production of stainless steel, the price of the metal can depend on the health of the overall global economy. When demand for steel is on the rise, nickel prices will generally follow.
  • Substitutions: Some engineers have been substituting low-nickel or ultra-high chromium stainless steel in construction applications, while nickel-free stainless steel is increasingly popular in the power-generating or petrochemical industries. To the extent that further technological improvements deliver cost efficient substitutes for nickel, prices of the metal could drop.
  • Exchange Rates: Because nickel and nickel futures are priced in U.S. dollars around the world, there is a relationship between the value of the U.S. dollar and the price of the metal. When the U.S. dollar depreciates, nickel becomes cheaper (in terms of the local currency) to international consumers. As such, their demand increases and pushed the U.S. dollar price higher. The opposite scenario plays out when the dollar appreciates; that can put downward pressure on nickel prices.
  • New Discoveries/Mines: As with any commodity, new discoveries of nickel can lead to greater supply and lower prices. Several discoveries have been made in recent years that have increased the global supply.
  • Mining Activity: Many of the world’s most productive nickel mines are located in emerging markets that can occasionally be vulnerable to corruption or other geopolitical tensions. To the extent that there is a strike or other disruption at a major nickel mine, prices may see a jump. But the development of emerging markets can also enable these countries to tap into new reserves, and new mine openings can increase the supply available on the global market.

Investing in Nickel

Nickel’s appeal as an investment comes from its widespread use in industrial applications, and ability to serve as a hedge against the U.S. dollar and inflationary pressures in certain environments.

Physical Nickel

Investors looking to gain exposure to nickel have the option to invest in nickel bullion or bars, though the relatively low value-to-weight ratio will require storage arrangements for any material amount of the metal. There are a number of nickel dealers online, and nickel coins are popular among some collectors.

ETF Securities offers a physically-backed nickel ETF on the London Stock Exchange, and the company recently filed for approval on a version of that product that would be listed in the U.S.

Nickel Stocks

Investors also have the option to gain exposure to nickel prices through the stocks of companies that are engaged in the discovery and extraction of the metal. Because the profitability of these firms depends on the market price for their goods, these stocks often exhibit a strong correlation with spot nickel prices.

However, it should be noted that there are very few “pure play” nickel miners; many companies engaged in the extraction of nickel also produce other industrial and precious metals as well. That factor may diminish the correlation to nickel prices.

Miners whose operations are primarily focused on nickel include:

  • Norilsk Nickel
  • Jinchuan Group
  • Jilin Jien Nickel Industry Co

Nickel Futures

Nickel futures are traded on the London Metal Exchange, with contracts priced in dollars and cents per metric ton and traded in lot sizes of six tonnes (about 13,200 pounds). Clearable currencies include U.S. dollar, Japanese yen, sterling, and euro.

The minimum price movements are as follows (outright):

  • Ring: $5.00
  • LME Select: $1.00
  • Inter-Office: $0.01

See all LME nickel contract specifications.

Nickel ETFs/ETNs

There are also exchange-traded products offering exposure to nickel prices. U.S. investors have a choice of the iPath Dow Jones-UBS Nickel Subindex Total Return ETN (JJN), which is linked to an index comprised of nickel futures.

Investors in London have more options, including the physically-backed product mentioned above. In coming months, it is possible that a physically-backed nickel product will be available in the U.S. as well

Resources on Nickel Investing:

Source: The Ultimate Guide to Nickel Investing