Nickel is a commodity with volatility at its core, but investors just want to know how to navigate this and make themselves a tidy profit. We recently interviewed Mark Selby; he helped shed a light on this.
Why not read a different nickel article once you’ve finished with this one?
History Of The Nickel Market
Nickel has always been much more volatile than other base metals. It is a large market, but not relative to copper, zinc or aluminium.
Since the 1980s, Nickel has been regarded as a boom/bust metal that moves in giant super-cycles:
In the late 1960s, nickel reached the equivalent of US$50/lb (in today’s dollars).
Contextually, nickel was a hot topic at the time. Rising demand, driven primarily by the Vietnam War, in association with a shortage of supply caused by industrial action at one of Canada’s largest suppliers, Inco, tipped the supply-demand scale of nickel into massive shortages and kicked prices into overdrive.
This, in turn, led to the Poseidon bubble: a stock market bubble in which the price of Australian mining shares skyrocketed towards the end of 1969 before they crashed in early 1970. The peak was generated by the discovery of a purported promising nickel deposit by ASX-listed nickel producer, Poseidon Nickel, in September of 1969.
While the official Rae Committee report cited trading malpractice as the reason behind this bubble, it serves as a reminder to investors that nickel and volatility have always been joined at the hip.
In the 1980s, nickel went through another supercycle as supply from the Soviet Union dropped off and a new wave of demand emerged from the Asian tigers at that time, Korea and Taiwan. Unfortunately, the collapse of the Soviet Union in the 1990s led to a complete drop in demand from a country that had been a substantial consumer, which was then followed by the influx of mass quantities of scrap into the market, generated by the collapse.
The most recent nickel crash had ramifications that remain active today. It came off the back off a price rise to over $50,000/t in 2006, as demand globally and from China outstripped supply; traditional nickel industry participants were slow to respond. This led to world warehouse stocks of nickel falling to an extremely low level. Nickel really did lose ‘touch with industrial reality’ during this period, as warned by the biggest nickel producer in the world at the time, Jinchuan Group Ltd.
The Outlook for the future
With a decade of underinvestment in new nickel supply, in addition to the increasingly prominent electric vehicle (EV) thematic, investors can look towards a possible super cycle in the early-to-mid 2020s.
Selby himself believes we have completed “leg one, of what will be three or four legs” in terms of price increase.
But what does the evidence say? Here are some of the current market conditions Selby claims can occur before the dawn of a supercycle:
- A period where investment is lacking. There are several large mining companies that own a number of leading nickel assets, but they have chosen to allocate capital to non-nickel projects over the last decade. The majority of existing production has shrunk.
- Many of the existing nickel mines are deep underground mines or larger scale processing plants, which means they would not be able to rapidly ramp up production within a 12-month timescale. It would take multiple years to develop them. Projects need to be approved, production needs to begin, then it needs to be ramped up. In many instances, this can take at least 5 years (from announcement to full production capacity). Selby gives several examples of this.
- Selby says there needs to be a surge of demand, similar to what was seen in the 1960s when Japanese industry increased nickel consumption exponentially, and the 1980s, when Korea and Taiwan were industrialising. In the 2020s, EVs are the source of price-discovery-related hope. A demand growth of 4% (slower than the 5% growth seen in recent years) and a reasonable forecast of EV demand, nickel supply lead to forecasts that place nickel use between 2018-2030 at a 782000t increase on the previous 12-year period.
Now investors know some of the history, they can make more educated investment decisions in the future. You now know what you’re looking for in the market. If you buy the nickel macro story, it’s time to get busy.
If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.
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