Nickel Bull Market
Scott Wright September 1, 2006 2713 Words
Today’s powerful commodities bull market has been host to a myriad of commodities enjoying varying degrees of success as the greater secular trend marches higher. Base metals though have been in a league of their own in the last twelve months. The workhorses of this bull, precious metals and energy, have even taken to the crowd of recent in order to witness the march of the industrial metals.
As is apparent to astute observers, the global economy has kicked into high gear the last half decade or so. And base metals serve as key ingredients that lay the structural foundation of this global build out. Led by Asia’s voracious appetite for the natural resources that are required for such undertakings, global warehoused stocks of the critical metals necessary for this growth have been devoured.
Mixed with a dollop of speculative fervor, simple economic fundamentals have been the true drivers of this global resources pinch. Demand for the metals that feed this build out has paced well ahead of supply in recent years causing inventories to dwindle and forcing the producers that bring the metals to market to scramble to keep up.
The major base metals that have driven this amazing rally in the last twelve months are aluminum, copper, zinc, nickel and lead. Though these metals are not precious, have no store of value and are still known to have vast untapped resources, their innumerable industrial uses are absolutely invaluable and when a supply imbalance occurs, their commoditized nature can take the markets by storm.
To give you an idea of how base metals have performed so far in this bull market, below are their bull-to-date and 2006 peak gains. And in order to give perspective to the wild ride these metals have been on, I’ve included the same performance data for the precious metals.
Silver +272%, +65%
Platinum +221%, +36%
Gold +181%, +36%
Nickel +629%, +138%
Copper +575%, +88%
Zinc +450%, +109%
Lead +263%, +32%
Aluminum +145%, +39%
The right-side 2006 gains reveal how these metals have done from the beginning of the year to their recent peak. For the majority of these metals the low point for the year took place on this year’s first trading day, but it should be noted that lead is the exception as it took a pounding in the second quarter and fell well below its beginning-of-the-year price. It is definitely the weakest of the base metals in 2006, but lead’s resilience this quarter has driven it back above its beginning-of-the-year starting point.
As you can see not only in the bull-to-date gains but in the 2006 gains, base metals have rocked the commodities world. Copper is typically the most talked about of the base metals among the mainstream gabbers as its amazing gains partially tell the story of its fast-growing world demand. But copper is not the leader of this group as far as gains go. Have a look at nickel!
Nickel has had an incredible run early on in its own young bull market. From its low in late 2001 of $2.00 per pound, nickel has experienced little letup in its push to its very recent all-time high of $14.60. And nickel has been the talk of the town in global futures markets in the last month as it recently eclipsed the $30,000 per metric ton (1 metric ton = 2,205 pounds) mark for the first time in its 27 years trading on the London Metal Exchange! The 600%+ gain nickel has put up in just the last five years is typically unheard of in any trending market, but the fundamentals of this finite metal might call for it to push even higher as the great commodities bull of the 00’s charges forward.
So what makes this metal that the U.S. five-cent coin is named after so special? Well first it is interesting to note that a U.S. nickel is actually only comprised of 25% of its namesake with copper accounting for the balance.
Aside from its use in minting though which accounts for only a fraction of its global consumption, nickel has excellent fundamentals among many of its irreplaceable functions. Its main use is as an alloy in stainless steel which commands over two-thirds of its global demand. It is also heavily relied upon in various non-ferrous alloys, jet engines, manufacturing plant equipment, CD and DVD pressing and rechargeable batteries.
But as mentioned earlier, it is simple economics that ultimately explain nickel’s rise. Demand has continued to outstrip supply. Just last week Charles Goodyear, CEO of top global miner BHP Billiton, reiterated the strong fundamentals that base metals, in particular nickel, should continue to exhibit. As the world’s third largest nickel producer, BHP has a good pulse on the market for this metal and foresees 2006 global nickel production coming in over 20,000 metric tons short of expectations.
Mr. Goodyear cites “disruptions in the current market environment” as one of many reasons for the current high base metals prices and expected production shortfalls. Mr. Goodyear goes on to explain, “there is a limited availability of resources to tap into to bring more metal into a very tight market, and there are lengthy regulatory processes to go through to bring resources into production … the machines and people needed to exploit these resources are also in high demand and difficult to secure … the disruptive factors come from weather, exhausted machinery in an industry operating at full capacity for three years and industrial action by unionized workers pushing for higher wages.”
Mr. Goodyear does an excellent job outlining the essence of this base metals bull and many of the underlying factors driving its core strategic strengths. And nickel in particular has been pushed to its recent heights partially due to its rarity as compared to the other major base metals.
As measured by volume, the mined nickel brought to market each year is significantly less than the other major base metals. Aluminum has the highest volume with over 31 million metric tons mined annually, more than twice as much as copper which is the next closest. Nickel ranks at the bottom of these major base metals with mined volume half that of lead measured at 1.5 million metric tons in 2005.
But interestingly, nickel production has not been lagging over the years. In 1994 there was less than 1 million metric tons of nickel extracted from the earth and each subsequent year the volume has incrementally increased. But shockingly a 66% increase in global nickel production over the last twelve years has still come short of fully meeting demand.
According to the U.S. Geological Survey, since 1950 stainless steel production in the Western world has been growing at an average rate of 6% per year. And with Chinese demand continuing to skyrocket since the turn of the century it is no wonder record 2005 mine production still fell short of demand.
Even the conservative International Nickel Study Group estimates there could be a nickel shortfall of over 6,000 metric tons in the first half of this year as other sources cite even more of a spread. As hinted at earlier, the result of this strong nickel demand has led to global warehoused stocks being pilfered down to alarmingly low levels.
This year alone the LME has seen its warehoused nickel supply plunge by a staggering 83% with recent reports showing current supply of less than 7,000 metric tons. This is the equivalent of less than two days worth of global nickel consumption and goes a long way in explaining why speculators and consumers alike are worried about future nickel supplies.
This first chart dissects nickel’s current young bull market, but it is nickel’s recent breathtaking ascent that has us talking about it today. Since November 1, 2005, just ten short months, nickel has climbed a near-parabolic 179% to jaw-dropping levels. Where it will balance and consolidate from here is anybody’s guess, but at worst I believe this recent drive is psychologically preparing consumers to view $8.00 nickel as an acceptable and possibly even cheap baseline.
The first thing you may discover in looking at nickel’s bull run is that this recent parabolicesque upleg was not its first. Toward the end of 2003 nickel exited its orderly ascent and carved its first parabola rocketing 130% higher in just six months.
Nickel was not the only metal to experience this late 2003 price surge and I believe this was the result of what I like to call the China Effect. During these waning months in 2003 speculators finally got a good grasp of the current and future impact China was having on the base metals markets and painted a bullish fundamental picture going forward hence sharply driving up the prices.
But as with all parabolic surges, regardless of the driving factors, there are consequences investors and speculators must bear as euphoria gets out of hand. As is apparent all throughout market history, in order to balance sentiment corrections are necessary even in bull markets. And in early 2004 nickel bled 41% after its parabola reached its apex.
Thankfully in secular bull markets corrections usually do not fully give up the ghosts of their previous uplegs. And since commodities bulls are not driven by concept but rather economic fundamentals, the greater strategic uptrend will grind higher achieving higher highs and higher lows until a sustainable balance for these finite resources can be achieved. So corrections in these types of markets have nary a symmetrical look as compared with their previous uplegs.
With this in mind, nickel provides a prime example of a unique characteristic base metals have shown as their prices thrust higher. Unlike gold or gold stocks, where uplegs are typically followed by corrections that lead to consolidations well below their apex, base metals tend to consolidate in a flag pattern near their top until they are ready to charge forward once again.
After nickel’s early 2004 correction it continued in an uptrend that developed a new support zone just about in line with where its original support was before the parabola. This uptrend though remained inside of a greater trend channel that confined nickel in a sideways consolidation that lasted for over two years. Nickel climbed to just over $8.00 per pound at the apex of this first parabola, and remained in a sideways grind that saw it bounce between $5.00 and $8.00 until it finally broke out in April of this year to achieve a fresh high.
And this latest powerful upleg in nickel is something to behold. It even makes the other base metals look like underperformers! On May 11, the base metals finally looked like they had reached the apex of their second powerful upleg. Since this time, aluminum, copper, zinc and lead have been in a sideways consolidation just below their May 11 peak. But as you can see in this next chart, nickel has taken on a life of its own separating itself from the base metals herd.
As the other base metals have appeared to settle into an orderly post-upleg consolidation after their May tops and initial sharp corrections of -24%, -26%, -31% and -25% for copper, zinc, lead and aluminum respectively, nickel chose to take a different path. After a quick -19% nine-trading-day breather from its initial May double top, nickel has proceeded to march higher. And higher and higher, continuing to shatter its own highs bringing us to the levels we see today.
Though I hardly think nickel can maintain these levels and gains without at least some sort of temporary crash, correction or consolidation, why the deviation from its counterparts?
Other than overly thinning global inventory, there is no single event that can be isolated as the catalyst for this move. It’s not like any of the top global nickel mines sunk into the earth’s crust or nickel itself became the only accepted global currency overnight. But with today’s solid nickel fundamentals as detailed above, there may not need to be a scientific explanation for its recent performance.
And as a speculator witnessing nickel’s awe-inspiring price action, the opportunities that arise from this have me chomping at the bit. This nickel and in general base metals bull market has made futures traders betting in the right direction barrels of money. But what is still not widely known is that the average investor can take part in this powerful bull by acquiring the stocks of the explorers and producers that are charged with bringing these popular base metals to market.
Most producing nickel mines today were brought into production with their nickel metal being economically feasible at market prices of under $3.00 per pound. If five years ago you’d have told any seasoned nickel professional that $8.00 per pound nickel is perhaps a cheap and acceptable norm with prices even shooting past the $10.00 level, they’d have strung you up for being stricken with irrational exuberance. For this reason, nickel miners that are leveraged to its market price are able to score incredible profits as their cash costs remain low.
Even if nickel corrects down to its levels before this recent surge, those miners that are currently producing or developing the nickel mines of the future are likely to greatly capitalize from a secular bull market in their underlying metal. And with metals prices currently hovering around record highs, current producer companies are continuing to yield record profits for their shareholders.
In the same fashion that gold and silver stocks caught their bid as the precious metals took off, base metals stocks have incredible potential going forward. But unlike gold and silver stocks, most base metals stocks still exhibit obscenely low valuations and are ripe for the picking. Even Mr. Goodyear echoes the fundamental sentiment of this base metals bull claiming that resource companies are currently trading at bear-market multiples.
Even though many base metals stocks have enjoyed good initial run ups in this young bull market, they still lie in relatively undiscovered territory for most investors and speculators. As the word gets out that base metals stocks are still cheap, capital should flood into them eventually driving their values to appropriate bull market levels greatly rewarding those prudent ones that were in the door first. With this in mind, we’ve been researching base metals stocks all summer wading through the hundreds that are out there on a quest to discover the best fundamental plays.
We have just published another of our comprehensive research reports that identifies our favorite 20 base metals stocks. These reports contain detailed fundamental discussions on the individual stocks we believe have a high potential for success in various sectors within the commodities bull market. Included in this base metals stocks report are not only a handful of very promising and undervalued nickel plays, but those companies that focus on copper, zinc, lead and molybdenum among the many base metals.
The stocks highlighted in this report range from small-cap junior explorers to major producers. This inside look at our research provides a sample of what we deem the best of the best base metals stocks ultimately designed to support future base metals stock trades for our newsletter subscribers.
The technical buy and sell decisions are timed and discussed within our newsletters based on current market conditions among many factors. But the ongoing stock research for each sector is too detailed and extensive to cover within our newsletters, which is why we publish our research reports. If you are interested in getting an inside look into our favorite base metals stocks, please purchase our latest report today.
The bottom line is nickel is indeed one of today’s hottest commodities. As this metal’s global imbalance works to correct itself, prices should continue to stay high for many more years. With this, the suppliers that are bringing nickel to market now and in the future are positioned to achieve vast profits.
And investors and speculators wishing to take part in this excellent bull market not only in nickel but in any of the base metals can multiply their capital through the elite companies that discover and extract the various metals from the earth. Base metals stocks are still cheap, and a continued bull market in these metals should drive them considerably higher.
Scott Wright September 1, 2006 Subscribe at www.zealllc.com/subscribe.htm