ALERT: Nickel deficit imminent!

Secular Investor

Nickel has been one of the weaker performing metals in the past few years. The price for the base metal which is mainly used in the production of stainless steel has been on a steady decline lately:

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The drop in the price was caused by an oversupply. And of course, the simple rule of economics is that when your supply increases, at a faster rate than your demand, the price will go down.

And that’s exactly what happened.

But as you can see on the previous chart, the nickel price has gained approximately 20% in 2016. You might be wondering why, but the answer is pretty simple.

It’s finally confirmed; the nickel market is in a deficit!

The demand for nickel is higher than the current production rate, and the inventory levels are decreasing.

Of course, the total level of these inventories has increased tremendously in the past few years (+300,000 tonnes since 2012), and a deficit of just below 15,000 tonnes won’t cause a huge difference to that situation… for now!

But there’s more. Not only is the demand growth outpacing the growth on the supply level, the market is predominantly looking at Southeast Asia, where Indonesia and the Philippines are the dominant producers. The two countries supply approximately 28% of the world demand for nickel.

In a previous edition of the Commodity Report, we explained why we weren’t too nervous about Indonesia’s relaxation of the nickel ore export ban. But things got really interesting last week, with the recent news from the Philippines.

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The Philippines is the largest nickel producer in the world, and produces more nickel than the numbers 2 and 3 COMBINED! Needless to say: any changes on the Philippinean nickel front might have a huge impact on the supply chain.

The country’s new president has asked his administration to audit all mines in the Philippines, and last week, he issued a presidential decree to close 23 mines. Per the minister of natural resources, the majority of these mines are nickel mines, which account for 50% of the country’s nickel output.

And that’s what’s really important. The Philippines produce 530,000 tonnes of nickel per year. If even just half of the mines (that have been banned) will indeed be forced to shut down, approximately 125,000 tonnes of nickel will be removed from the supply side.

That’s 5% of the world production!

Removing that amount of nickel from the equation, will make a lot of people very nervous.

The market is currently in an equilibrium, but the warehouse and exchange inventory levels will come down FAST. Should (some of) the Philippinean mines indeed be closed, the total supply deficit will jump overnight to more than 250 million pounds per year!

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You don’t need to be a rocket scientist to understand the nickel price will increase dramatically, if the supply curve shifts. It’s one of the basic economic laws, as you can see on the previous image.

Sure, some projects will be brought online once the nickel price increases towards the $6/lb price level, but it will be IMPOSSIBLE to replace 125,000 tonnes of nickel per year. This means the inventory levels will decrease RAPIDLY, putting pressure on the existing mines.

The gap won’t be filled for several years, as you obviously can’t build a new nickel mine overnight.

And that’s exactly why the Selection List of the Commodity Report offers exposure to nickel.

Yes, the past few years have been tough. But things are moving on the macro level and if the Philippinean ban will indeed be enforced, we will have front row seats to benefit from this.

 

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  1. Nickel
  2. Nickel deficit
  3. Nickel Stock