Gold is hot but there’s another metal which is hotter, nickel.
Up 30% over the past two months nickel has delivered more than double the performance of gold which is up 13% over the same time, and the gap could get a lot wider as the supply of nickel stagnates and demand accelerates.
The driving force behind the recent awakening of gold is well-understood and can be summed up as a flight to safety as the China v U.S. trade war slows global growth and values of conventional, or fiat currencies, are debased by governments resorting to quantitative easing or other forms of creating money.
Nickel’s drivers are different and far easier to understand and boil down to a simple case of supply exceeding demand which, in past nickel booms, was essentially a case of mines failing to keep up with the requirements of steel mills making stainless steel, a material which has traditional consumed close to 80% of the world’s nickel.
Demand Growing For Nickel In Batteries
Stainless steel remains the primary market for nickel but there’s a faster-growing market which until a few years ago was insignificant; lithium-ion batteries.
A standard source of power in small appliances such as cell-phones with their nickel-cadmium (NiCd) batteries, or nickel-metal hydride (NiMh) rechargeable batteries the big game today is in the battery packs which power electric cars such as the Tesla, Prius and Leaf.
From being a metal easily described as a one-trick pony thanks to its dominant end-use in stainless steel, nickel has suddenly become a two-trick pony, and if electric cars take off as predicted then a shortage in future years is possible.
What caused nickel to run from around $5.40 a pound two months ago to $7.09/lb at the end of last week (and a high on Friday of $7.22/lb) was a combination of strong demand from Chinese stainless steel mills and speculation that a major source of the metal could be cut off sooner than expected.
The source under threat is unprocessed nickel ore from Indonesia which is shipped to China for use in steel mills as a material called Nickel Pig Iron (NPI). Indonesia, and other countries which produce NPI dislike the material because it does not require any value-adding in the home market.
Previous bans on NPI have crimped the industry only for it to return. But the next ban is expected to be permanent and while Indonesia has said it will not be applied until the year 2022 it could happen sooner, just as battery makers seek supplies of nickel to meet electric-car demand.
ANZ, an Australian bank, warned two weeks ago that falling stockpiles of nickel metal were a warning of a squeeze developing. Stockpiles in warehouses managed by the London Metal Exchange (LME) have been falling for the past four years, with an accelerating decline over the past two, a time when reserve inventories dropped by 43% from around 250,000 tons to 142,000t.
“Nickel inventories have declined steadily since early 2018, as the persistent market deficit takes a toll,” ANZ said.
“Some analysts suggest stockpiling by electric vehicle manufacturers is behind the depletion. Whether this is the case or not, we see the tight market meaning further inventory drawdowns are likely.
Talk Of Panic Buying
“Current LME stockpiles would meet less than two months of supply — so panic buying is a likely outcome.”
It is highly unusual for a bank like ANZ to use an expression as emotive as panic buying but it was used largely because of concern that speculators had become active in the nickel market ahead of Indonesia’s reintroduction of a ban on NPI.
Pure-play Australian nickel mining companies are enjoying sharp share price rises as the nickel price moves up. Western Areas has risen by 25% over the past month and Mincor, which has just re-signed a supply agreement with BHP, a major producer of the nickel sulphate which battery makers prefer, is up 28%.
If there is a squeeze developing on nickel supplies as a major new market develops for the metal the price could go much higher than its current $7.09/lb.
Back in 2011 when a supply shortage developed the nickel price hit $22/lb, before falling rapidly as steel mills found substitutes for nickel in their stainless steel, including manganese.
No-one is talking about a nickel boom as powerful as that in 2011 but nickel has a long track record of extreme moves, up and down.