🔪️ Your Guide To Investing In Nickel, The Popular Base Metal Used To Make Stainless Steel, Among Other Things

Brief Background

When we say nickel, we’re referring to the base metal itself, not the coin used in the US! You might not think of nickel as an investment asset solely because of its association to the coin, but rest assured that nickel is used in many industrial and consumer products, and increasingly, in electric vehicles, making it an important commodity. Part of the reason why it’s not as known as other metal commodities today is because it’s mostly used as an alloy, combined with other metals, to create other products, like stainless steel. However, its use in battery systems (like electric vehicles), though currently representing a small percentage of global nickel demand, certainly presents opportunities for growth in the long-term.

What Can It Do For You

🧺 Portfolio Diversification. As always, adding commodities to your portfolio can help diversify and lower risk. Adding nickel to your portfolio means owning an asset that tends to act differently to other asset classes, and even to other commodities.

💰 Profit. As you can see from the price chart below, nickel prices have undergone periods of volatility, providing opportunities for speculative returns. This volatility is also partially due to the fact that supply is very concentrated in a handful of countries, making it vulnerable to supply disruptions and price fluctuations. Since nickel is used in various infrastructure projects and major industrial and consumer products, it’s arguably linked to how well the global economy is doing. Generally, there are a number of trends that can act as support for nickel prices. These include growing Chinese demand, infrastructure demand (especially from the US, outlined in the Biden administration’s proposals), increasing electric vehicle and nickel-based battery system adoption, and quite surprisingly, climate change as well. That being said, there are a number of risk factors that can put downward pressure on prices. These include potential overproduction of the metal in response to rising prices, excess stockpiling by China, & global economic & political uncertainty which can lower demand for the metal.

Price chart of a nickel futures contract over the years

What Affects Nickel Prices

There are several key factors that are involved in moving the price of nickel:

  • 🇮🇩🇵🇭 Indonesian & Filipino Production. Indonesia is the world’s biggest nickel producer, accounting for about 32% of the world’s supply, according to the USGS. Add the Philippines, and this goes up to ~45%. Any disruptions in supply in these countries can have an impact on prices.
  • 🇨🇳 Chinese Demand & Economic Strength. As with a number of other commodities, Chinese demand can certainly impact prices. In fact, as seen in the graphic below, China accounts for roughly 66% of world nickel ore imports. Furthermore, generally speaking, part of the reason why there’s such high demand for nickel in China is because of rapid economic development and numerous infrastructure projects in the country. So, should China’s economic activity slows down, this could potentially lower demand for a number of commodities, including nickel.
  • 🏛️Government Policy. Things like subsidies, tariffs, and trade policies can definitely have an impact on nickel prices. For example, Indonesia introduced export bans on nickel ore in early 2014 & 2020, and in both cases, prices jumped by 50% & 31% respectively in response to the ban. Furthermore, policy decisions to invest in new infrastructure projects, the ones that the Biden administration is putting forward, can certainly add to demand for various metals, including nickel, and push prices higher.
  • 🔄 Substitution. As a metal alloy, nickel can also be substituted with other types of metal alloys for various industrial applications. This can potentially lower demand for nickel should prices go too high and consumers are incentivised to switch to alternatives.
  • ☀️ Weather/Climate Change. You might be surprised to know that nickel can be affected by adverse weather conditions. As mentioned above, Indonesia is a major nickel producer. Drier conditions and prolonged droughts can impact nickel production in the country since it affects hydroelectric power generation facilities supplying electricity to the nickel extraction sites, & has lowered water levels in canals, preventing the export of the metal. This then causes delays and disruptions in supply, which can affect prices.
  • 📈 Stock Levels. Stock levels can certainly play a part in moving prices as it can be a key indicator on supply and/or demand levels, which can then lead to speculation in the market. The London Metals Exchange (LME) produces a monthly report on stock levels for various metals.
  • 🔬 Innovation (Like Batteries). Innovation and widespread adoption of nickel-containing products (like batteries for electric vehicles) can certainly increase demand. Currently, batteries represent a tiny 4–5% of global nickel demand, and this is expected to increase in the long-term.
  • 🏷️ Production Costs. Input costs such as the cost of electricity, coal, and crude oil can have an impact on nickel extraction. Furthermore, recycled scrap nickel metal can also impact prices as it adds to supply in the market.
  • 💵 US Dollar Strength. The benchmark for the pricing of nickel is in US dollars. A weak dollar compared to other currencies (i.e. need more dollars to buy other currencies) may incentivise foreign buyers to buy (since their currencies are worth more in dollars & so can buy more nickel) & drive up demand, increasing prices, and vice versa. A weak dollar can also put off nickel producers from increasing output, since miners will receive less of their home currencies for the weaker dollar.
World nickel mine production & reserves, according to the USGS.
Global exporters and importers of nickel ore. As with many other commodities, China is the largest importer for nickel ore.

What Is It Used For?

Nickel is used in a variety of important industrial and consumer products. Here are some of its uses:

  • 🔪 Stainless Steel. About 70% of all nickel is used to produce stainless steel. Stainless steel itself has many uses, ranging from food and beverage equipment, to pipes and storage containers, to cookware and cutlery.
  • 💻 Electronics. Nickel is used in electronic components, like connectors, processors, and integrated circuits.
  • 🖌️ Plating. Plating/coating is basically applying a thin layer of the metal or metal alloy on a surface. This is important because this can change the properties of the items being plated, like conductivity, durability, performance, etc. Examples of nickel plating is used in coins, vehicles, certain plastics, and planes.
  • 🧪 Chemical Catalysts. Nickel is also used as a catalyst to help with chemical reactions.
  • 🔋 Rechargeable Batteries. Increasingly, nickel is used as a key component in rechargeable battery systems, like electric vehicles.
Usage of nickel by application, according to the Nickel Institute.
Usage of nickel by industry, according to the Nickel Institute.

The Case Against Nickel

There are a couple of risks involved if you want to get involved with nickel. Firstly, as seen above on nickel’s price chart, prices have steadily been going up, and this may incentivise miners to increase production. That being said, it may take a while for the increased output to reach the market, but certainly something to look out for. Secondly, China is currently the world’s biggest nickel ore importer by a large margin. Efforts to stockpile could create a supply excess situation, which could put downward pressure on prices. Thirdly, as mentioned above, nickel is arguably tied to global economic growth, since it’s used in various infrastructure projects and industrial and consumer products. A global economic downturn (like the pandemic) can lower demand for the metal in the short term.

The Case For Nickel

Firstly, like other commodities, not only can nickel serve as a portfolio diversification tool & a hedge against inflation, but it can also provide opportunities for speculation and profit, as seen from the volatile price chart above. Overall, there are a number of trends, both long term and short term, that can certainly act as support for nickel prices.

Firstly, China is by far the biggest consumer and importer of nickel due to its strong economic growth. Investing in nickel essentially means betting on further growth in the Chinese economy.

In addition to this, as countries invest in infrastructure projects, this increases demand for a variety of base metals, including nickel. Infrastructure policies proposed by the Biden administration can certainly increase demand for the metal, which can push up prices.

Thirdly, nickel’s use in battery systems such as electric vehicles represents a tiny percentage of global nickel demand. In the long term, as consumers embrace electric vehicles and manufacturers source more efficient battery systems, nickel prices can certainly benefit from increased demand in this field.

Furthermore, as mentioned above, nickel supplies are very concentrated in a handful of countries, most of which comes from Indonesia. Interestingly, Indonesia has implemented a nickel ore export ban in January 2020 to support domestic smelting industries. In fact, this is the second time the export ban has come into effect, with the first time occurring in early 2014. Prices jumped by 31% & 50% respectively, as seen in the price chart above. Further restrictions implemented can certainly further push up prices.

Last but not least, surprisingly, climate change can have an effect on nickel supplies and prices. Since nickel supplies are concentrated in a few countries, drier conditions and prolonged droughts in these countries can impact production and logistics as not only does it affect hydroelectric power generation facilities supplying electricity to nickel processing facilities, it can also lower water levels in canals, preventing the movement and therefore export of nickel to world markets, causing delays and disruptions. In the long term, increased frequencies of these adverse weather conditions has the potential to continue to disrupt supplies in the market.

Popular Ways To Invest In Nickel — Pros/Cons of Each

Here are some of the more popular ways in which you can invest in nickel. If you’re still confused about how any of these work, refer back to our basics newsletter for a refresher.

  • Physical Nickel (Bullion Bars & Coins). You can buy and directly hold physical nickel bullion bars or coins. There’s no doubt to the ownership of these assets, and is reliable. However, you may want to consider storing in a secure storage facility rather than at home. Further, you may be faced with several fees — the cost to convert raw nickel ore into finished bars and coins tends to be passed on to you, as well as commission fees for the broker acting as the middleman. Selling it may also prove to be an issue as the broker may buy it back at below market prices. Be sure to find reputable sellers for a greater degree of transparency in the sales process.
  • Nickel ETFs. Nickel-backed ETFs/ETNs are traded on stock exchanges, so they’re very easy to buy and sell. However, there are no assurances that you actually own the physical metal. You also probably won’t be able to take delivery of your nickel. Depending on which broker you go with, you may be charged with trading commissions. ETFs/ETNs also charge an expense ratio, or management fee that gets taken out of their total holdings and is then reflected on your account. Whichever ETF or ETN you choose, be aware of the fine print — the risks and costs.
  • Nickel Stocks. These are shares of companies that have exposure to nickel prices. There are no fees, apart from trading commissions depending on your broker. They don’t necessarily follow the price of nickel since company profits and stock market movements need to be taken into account. Additionally, many of these companies also have exposure to other metals, not just nickel. Because of all this, you’re exposed to a greater number of risks involving company profitability, exposure to price movements of other metals, etc. You may want to consider looking at the company’s annual reports (especially operational costs), portfolio of what mines they have, the other metals they produce, and potential expansion plans.
  • Nickel Futures Contracts. A binding agreement traded on futures exchanges between two parties where they agree to buy/sell nickel at a specified time in the future with an agreed-upon price. The London Metals Exchange (LME) offers these contracts, with each representing 6 tonnes of nickel. These futures contracts are settled with physical delivery after the contracts have expired. Because you are using a significant amount of borrowed money, even small price changes in nickel can either lead to massive profit, or massive losses beyond what you paid for, potentially leaving you in massive debt. They are certainly high-risk and not recommended for beginners. Further, fees associated with futures trading include broker commissions, and exchange/clearing fees.

TL;DR — Is It The Right Investment For You?

As always, it depends on what your aims are. Similar to other commodities, nickel can not only be used as a portfolio diversification tool, but it can also provide decent speculative returns. Overall, there are quite a number of factors that can support nickel prices in the long term. These include growing Chinese demand, growing infrastructure demand (especially in the US with its recent infrastructure plans), increasing electric vehicle and nickel-based battery system adoption, and climate change, which can disrupt the logistics and production of nickel. However, there are a number of factors that can put downward pressure on prices. These include the potential overproduction of the metal in response to rising prices, excess stockpiling by China, & global economic & political uncertainty, which can lower demand for the metal.

🧺 If you are considering adding nickel to your existing portfolio or bundling it with a number of others, you may want to consider doing dollar-cost averaging (regular investments over time) to build your nickel position so you can take advantage of any volatility in the market.

💰 If you are considering adding nickel for speculation and profit, you may want to monitor the factors that affect nickel prices mentioned above. You may also want to keep track of the annual nickel publications provided by the USGS to identify supply and demand levels. Similarly, monthly stock level reports provided by the LME can also provide a snapshot to supply and demand. In addition to monitoring the factors mentioned above, you may also want to consider performing some technical analysis on nickel’s price chart to help consolidate trends and patterns to help with your decision. That being said, its price can also swing unexpectedly and dramatically, so be prepared and have an exit plan in place.

As always, if you are unsure, check in with a professional financial advisor before making any moves.

Thank you for reading! Let us know if you found this helpful. You can connect with us @VNewsletters, or check out our website for more information @ vaultcomms.com.

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