Investing in nickel is a bet on the prospects of the industrial and manufacturing sectors, both of which use lots of this base metal. Nickel investing, and investing in other base metals like zinc, iron, aluminum and uranium, is different from investing in precious metals like gold and silver. Base metals&#; prices move with the economy; precious metals&#; prices often move in the opposite direction of the economy. If you want to include nickel in your investment portfolio, consider working with a financial advisor.
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Nickel demand appears set to grow. Recently, Elon Musk, founder and CEO of Tesla, commented on the need for nickel in the production of electric cars. He pleaded with miners to mine more nickel. Another spokesperson for Tesla said that there is global underinvestment in the mining sector and noted that a shortage of base metals for electric vehicles may be on the horizon as a result.
Nickel is a key base metal in a society moving toward renewable energy and electric vehicles. It is in a wide variety of products like batteries, mobile phones, wind turbines, gas turbines and medical equipment. Most nickel currently used in production is found in stainless steel. Nickel is excellent in alloys, and there are 3,000 of them.
Electric vehicles and their batteries will drive most of the demand for nickel. There is a push to tap into renewable energy sources, and nickel is used in solar and wind farms. Nickel is also present in the type of batteries that will power electric vehicles. The World Bank issued a report discussing the future of renewable energy and the drive toward that goal. They stated that moving toward that transition would be nickel-intensive. China is and will continue to be a huge market for nickel as urbanization and industrialization in the world&#;s No. 2 economy grow.
Nickel reserves lie primarily in the Philippines, Indonesia, Australia, Canada and Russia. There are supply issues with nickel. It takes years for a new nickel operation to come online. Current nickel operations generate a fairly low rate of return. The various supply issues increase nickel&#;s price volatility.
Nickel mining is a capital-intensive operation. Few new nickel mines ever open due to extremely high capital investment requirements and huge entry costs. Nickel mining also leads to pollution in the area of the mines, both air and water pollution. Both require a lot of capital investment both to clean up pollution or, in the best-case scenario, to install equipment to mitigate the levels of pollution.
There are several important key metrics to consider regarding an investment in nickel. If you are going to invest in nickel mining securities, it&#;s important to look out for high leverage ratios. If the ratios of debt to assets or debt to equity are too high as compared to the rest of the industry, that can lead to possible bankruptcy. When nickel prices are low, companies can accumulate a lot of debt since the necessary capital investment is so high and the company may not have enough cash flow to service the debt.
Because nickel is a capital-intensive industry, nickel mining companies have large amounts of depreciation and amortization on their financial statements. Depletion is also a factor. These items lower net income.
It is wise to look at the income statement and analyze the EBITDA instead of just relying on net income. EBITDA is earnings before interest, taxes, depreciation and amortization. It may give you a different picture than just looking at net income since nickel mining has high depreciation and amortization. Analyzing a company&#;s debt to the EBITDA is important since it measures debt as compared to earnings before removing the big costs of depreciation and amortization.
Companies mining nickel may also try to mine another base or precious metal. You may find a company mining both nickel and gold or nickel and copper. Nickel companies undertake this venture to maximize their profit.
There are various ways to invest in nickel, some direct and some indirect. Indirect investments in nickel would include companies that make mining and processing equipment, provide transportation and companies that use nickel for manufacturing. Below are a few of the more common direct ways.
Purchasing the actual nickel bullion in the form of coins or bars is the most direct way to invest in nickel. Investing in physical nickel requires a storage facility with security. Since nickel is heavy and is low in value as compared to its weight, substantial storage must be available for investment in nickel bullion.
Most of the stock investment in nickel is in mining companies. Before you invest in nickel stocks, run the key metrics to determine the viability of the companies in the industry. Look at their history and plans. Then, go a step further and determine the global economic outlook for nickel as well as environmental and corporate governance issues. Analyze how the companies rate in their industry, their historical performance and their prospects. Besides pure-play stocks, there are companies that have exposure to nickel, but nickel may not be their primary product.
Nickel futures are traded on the London Metal Exchange. A casual investor does not want to get involved with nickel futures due to the complexity of the commodities and futures market. Futures are derivative securities because their value comes from the underlying asset. When a futures contract is placed on nickel, both the seller and the buyer have to fulfill their obligations. You also have to factor in storage costs for nickel and how interest rates affect them. A financial advisor can help you if you are interested in nickel investing using futures.
Nickel investing can be done by purchasing options on the future&#;s contracts. If the owner of an option decides he doesn&#;t want to fulfill his contract, he can walk away and only lose the money he has already paid to purchase the contract. Options have a strike price and if the value of the option rises above that, options owners can exercise their option since they will be in the money.
One of the best ways to gain exposure to the nickel market may be to invest in one of the two exchange-traded notes (ETNs) available. Exchange-traded notes are debt instruments, issued by financial institutions. They are similar to zero-coupon bonds.
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There may be several benefits in trading nickel. Portfolio diversification is one possible benefit. Even if you have an investment in precious metals, base metals like nickel have different properties and tend to move with the market instead of counter to it. Nickel is also a way to hedge against a weak dollar and inflation. In today&#;s market, it seems to be a given that there is going to be large-scale demand for nickel due to the demand for it by China. There is increasing demand for nickel to use in stainless steel. As the electric vehicle industry expands, and the need for batteries with it, the demand for nickel may explode. As demand increases, the price of nickel will rise.
There are substantial risks in nickel investing. There seems to be a growing undersupply of the metal. There are significant barriers to entry when opening a new mine. Nickel is a commodity and speculators try to trade on small price movements. If there is a global economic slowdown, the Chinese might not buy as much nickel. In this case, the U.S. could put its infrastructure plans on hold and that would decrease the demand for nickel.
Nickel could have a place in your portfolio, especially if you need to diversify into a base metal or believe that the global economy is on the upswing. Both the short-term and long-term outlook for it is good, although the risks inherent in commodities trading are significant. Keep in mind that commodities in general are subject to a lot of speculation and are considered highly risky investments.
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Nickel prices remained within a strong downtrend throughout November, hitting their lowest level since April . While prices appeared to stabilize during the first half of December, the nickel market has overwhelmingly proven itself the worst-performing base metal with a roughly 45% year-to-date drop.
Overall, the Stainless Monthly Metals Index (MMI) remained bearish, with a 6.59% decline from November to December.
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will wrap up with little change to the stainless market. One distributor noted an increase in quotation activity compared to Q3, but no meaningful uptick in sales. Another source labeled the current state of the market as &#;grim.&#;
Inventories throughout the supply chain remained largely unchanged throughout Q4, as they continue to hold at historically normal levels. While under normal conditions those levels would not inhibit buying activity, the bearish market has led to little interest in forward purchasing amid the ongoing devaluation of inventories.
Source: MetalMiner Insights, should-cost modelsQ1 nearly always experiences an uptick in sales activity, however, it remains to be seen to what extent demand will materialize come the turn of the year. Interest rates, while paused, remain at 22-year highs. This will continue to pressure consumer demand. However, some sectors have remained more resilient than others. Notably, distributors noted steady demand from the aerospace industry, while the food service equipment sector, the primary end use for 304, remains in a slump.
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The current state of the domestic stainless steel market comes in sharp contrast to flat rolled steel prices, which appear decidedly bullish. Both markets experienced considerable output cuts. For stainless steel, melt shop production cuts continued throughout the year, while within the flat rolled market, they occurred more recently toward the end of Q3.
Both domestic markets also boast consolidation among producers. While the latest acquisition of U.S. Steel by Japan&#;s Nippon avoided a further contraction of domestic suppliers, the consolidation of mills in recent years has allowed those companies to secure greater control over price direction. Meanwhile, within the stainless steel market, North American Stainless (NAS) and Outokumpu represent an effective duopoly in the U.S., pressured only by imports.
Despite these similarities, the use of a surcharge as part of pricing limited the ability of NAS and Outokumpu to control the overall market. Falling prices among raw materials proved enough to limit buying activity and prevent long purchases. This would have tightened supply enough to see base prices climb and mill lead times lengthen.
Consistently bearish nickel prices, which fell over 8% throughout November alone, added a strong drag to the surcharge. While mills managed to keep base prices flat for two years and counting, NAS&#; 304 surcharge dropped nearly 22% throughout . While nickel remains the most influential component, the December 304 surcharge was also dragged lower by an almost 16% drop in molybdenum prices and a nearly 7% drop in titanium prices.
MetalMiner&#;s Annual Metals Outlook, a comprehensive 12-month forecasting report for nickel and 6 other metal industries, just released it&#;s December update this month. View a sample copy here.
While nickel prices started to move sideways throughout December, there appears little indication of a near-term bullish reversal. Output remains robust in Indonesia. In its October press release, the International Nickel Study Group forecasted a 223,000-ton nickel surplus for , which it expects to expand to 239,000 tons in .
By September, LME inventories began to turn around from historic lows, and toward the end of December, inventories hit their highest level since January. Falling prices and rising inventories could eventually translate to output cuts, but that has yet to occur in a meaningful way. Beyond that, end-use demand from industries like the EV sector also didn&#;t materialized as expected. This could boost the projected surplus even further.
Much could still change in which might shift the overall outlook. However, by mid-December, LME investors stood decidedly net short in their positions. Investment funds, whose large positions can translate to a strong influence on overall price direction, saw short positions topple over long positions by the largest margin among all base metals. Such steep bearish positioning among funds could translate to volatility within the market, should their outlook begin to shift. Currently, however, it appears the market sees little optimism of a reversal in nickel prices anytime soon.
Nickel markets change constantly, and so should price forecasting. Don&#;t rely on a single forecasting point, use data science to take market fluctuations into consideration. Learn more by reading Data Science: The Key to Cost-Savings.
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