Nickel Prices Are On A Roll, But The Gravy Train May Not Have Biscuit Wheels

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By Stuart Burns

Before anyone with shares in nickel mines goes out and orders their new Maserati, a word or two of caution is in order.

Yes, by some accounts, nickel swung into deficit this year after five years of surpluses as global demand rose by some 4% and supply has been constrained by a lack of new investment, Indonesia's export ban on nickel ore exports and, more recently, a fall in exports from challenger Chinese supplier, the Philippines where low prices have reduced output.

Investors Are Cashing In

The euphoria among investors is not simply due to a change in outlook. Nickel prices have surged this year by some 13% according to the Financial Times with the latest boost coming from the Philippines' new environmentalist mining minister Gina Lopez, who has announced plans to audit domestic mines for compliance with environmental standards, the expectation is up to 70% could fail, resulting in them potentially having their licenses revoked. Two have already lost their licenses.

Meanwhile, demand has risen as major consumer China has continued its migration back to nickel-bearing 300 series stainless grades in the face of increased Asian demand. In the absence of sufficient nickel ore, China has been importing refined nickel, a trend many point to as the cause of a 75,000 metric-ton-drop in London Metal Exchange inventory since January.

Inventory is Lower, But Still High

Nevertheless, inventory is a good reason to not get carried away with these high prices being sustained. Global nickel stocks remain at around 25 weeks supply, and price increases this year are not going to do anything to encourage existing producers to rationalize production, quite the opposite, in fact. So, stock overhang is going to keep the market from getting too frothy and, indeed, we may expect prices to ease if the Philippines does not announce widespread closures in coming months.

In addition, there are reports that much of China's additional stainless steel production has either been exported or is going into inventory. Domestic demand is not as strong as imports of nickel have suggested and excess inventory could result in the easing of Chinese demand in the second half of this year.

So, maybe go for an option to buy that Maserati rather than putting down a deposit. Wait and see how the nickel price performs over the coming months, because nickel faces strong headwinds against further price increases this year.