US investors are safe from the nickel boom and collapse

There is good news on the horizon for the average American retail investor. A bubble is coming and one day Joe Investor will miss the boom and the crash. Two main stories create the potential for a short-term meteoric rise in prices, only to collapse rapidly as macroeconomic forces and political problems are resolved. In a world full of financial instruments, global exchanges, and products ranging from meteorological derivatives to technology indices to silkworm futures, basic metallic nickel is inaccessible to the average American retailer.

Ten years ago, nickel was traded at about $ 11,200 a tonne on the London Metal Exchange (LME). Currently, the market is nearly $ 18,500 per ton. The 65% rise in prices is an almost perfect correlation with the global GDP growth of the five largest economies in the world over the same period. In general, this makes sense, as nickel is used in nearly 3,000 alloys that we come into contact with on a daily basis. The rapid rise in nickel prices this year is not linked to global growth, but the collapse of nickel after a jump will be directly related to the slowdown in world GDP.

There are two main factors that are currently pushing nickel prices beyond their core value. The first issue was no surprise. Indonesia, the world’s second-largest nickel producer, imposed restrictions on crude ore exports in January. The law is designed to encourage the processing of Indonesian ore and increase domestic industrial development. Some concessions have been made to companies with new in-house projects that are already in the works, such as Freeport-McMoRan, but even their production is likely to be halved, according to their earnings report for the first quarter. After all, the world may see a drop in supplies of more than 8% in 2014 due to the introduction of Indonesian policy.

The second factor that is currently pushing nickel prices above their inherent value is the escalation of the political crisis in Ukraine. Russia produces about 16% of the world’s nickel. In addition, it produces nickel with a significant advantage over Indonesia due to the geological formations in which it is stored. Norilsk Nickel dominates nickel production in Russia. Norilsk Nickel, like Gazprom, is a quasi-governmental industrial group that will be shortlisted for the next round of NATO sanctions, as well as direct US sanctions targeting individual Russian businesses and owners, especially through banking and tax controls.

These short-term supply concerns are in the face of the macroeconomic picture, which continues to forecast a global slowdown. The Organization for Economic Co-operation and Development recently published its forecasts calling for global GDP to fall from 3.6% to 3.4%. This is the second projected decline in six months. Highlights include a drop in Chinese GDP from 8.2% to 7.4%. This factor cannot be minimized, given that the fivefold growth of the Chinese economy over the last 10 years is solely responsible for the 50% increase in nickel prices over the same period. Ironically, Chinese production itself will be a contributing factor to the decline in the metal, as they are expected to increase production by nearly 50%, contributing nearly 500,000 tons of total global production in 2014 of 1.85 million tons. Finally, their increasing production efficiency will allow them to earn even if nickel falls below $ 12,000 per tonne.

Futures markets are based on the delivery of a product at a given point in time at a price agreed between the buyer and seller of the product at the beginning of the contract. Natural goods also have storage costs along with insurance to cover their storage value. This creates a price structure in which the longest delivery times have the highest prices due to the associated fees. This pricing structure is called backward. The opposite is true of contango. Contango occurs when the short-term price is higher than the long-term price. This price structure represents a short-term supply shortage.

The nickel market is currently in varying degrees of contango according to LME charts. Nickel for current delivery is currently trading around $ 18,450 per tonne, and nickel for delivery after three months is trading slightly higher at $ 18,520. Meanwhile, nickel for delivery in December was $ 18.205, and nickel for delivery in December 2015 was up to $ 17.805. These prices make it easy to see that the short-term jump in prices does not reflect the market prospects for the bigger picture. In addition, the lack of retail access for US investors to LME makes it very difficult to trade on their stock exchange.

We have seen that supply disruptions create similar situations here in the United States. Usually, the excess of prices between the intrinsic value and the increased market price is fueled by media speculation, which eventually shifts to the individual retail investor in Main St. USA. Unfortunately, we have seen again and again when retailers pick up on the news, hoping to make a quick buck just to sink the ship once the market turns. These patterns are easily noticeable in the US futures markets due to the report on traders’ commitments published weekly by the Commodity Futures Trading Commission. This report tracks the actual purchases and sales of individual groups of traders – trading, index and small speculators. We follow these reports religiously and use them to inform us about the current prospects of the core industry in their respective markets. At least this time, the nickel bubble will not be filled with American money for a summer vacation.