Why Play Nickel When You Can Palladium?

One day TMM must put together a list of all the essential truths in commodities but for now we will just stick with just one – never trade nickel.

Take a look at the next chart which shows three month copper in yellow and nickel in white over the past five years. As you can see for almost all of the period, the relative move in the copper and nickel prices have at least been in the same direction even if the magnitude has varied... except recently. At a time when copper has sunk like a stone because of fears of a liquidity problem in the Chinese shadow banking system, nickel has soared higher because of fears of supply disruption from Indonesia and possible sanctions on Russia. Long nickel short copper looks a great way to play the current situation in Russia and China, but we at TMM would urge you to consider another option.



There are a multitude of problems with nickel which make it an essentially unforecastable product. The first is supply. Nickel is not all that rare but it tends to occur in very low grade form, mostly as what are called laterites (which are oxidised surface or near surface orebodies). The chief problem with nickel is not mining but metallurgical – i.e. it is a pain to extract. In most metal refining process you construct a combination of crushing. Grinding and chemical treatments that liberate the metal from the waste. That is not the case with nickel. It has the very unfortunate habit of behaving almost exactly like all the waste products you want to get rid of. So instead of separating out nickel from the waste, you spate the waste, fraction, by fraction from the nickel which is a long (can be 6 months) and hugely expensive process. There have been a lot of attempts to try a speed this up but none of them have really worked. Hence nickel metallurgical plants have to be huge and very expensive which in turn means you must have a giant orebody – which is quite rare – to support the cost of the plant.

However if you don’t mind a bit of pollution what you do is by-pass the nickel metal stage altogether and instead produce an iron concentrate which is rich in nickel (separating iron from nickel is the real problem in conventional planst0. You take this product and use it as a feedstock in a blast furnace to produce pig iron nickel which is then used as a feedstock for stainless steel. This is what China did about a decade ago and it completely blew up the nickel market. You could now go to low-grade small laterite deposits , do a rough concentrate and send it to China to make pig nickel. Although the process is dirty, china didn’t care. So the first problem of supply is that pig nickel production can ramp up and down very rapidly.

The second is demand. Essentially nickels only major use is in stainless steel. But, but, but it is not essential. Stainless steel is a horrible product to work with. Making it stainless cause it to be very difficult to weld and horrible to fabricate. Stainless steel contains a mixture of nickel and chrome, the more nickel the more pleasant to work with the more chrome the worse. You have to have some chrome in the mix but you don’t have to have nickel. When prices go too high you can produce 100% chrome stainless steel if you accept the engineering challenges. This means the demand for nickel is NOT a function of the demand for stainless steel but also the relative price of nickel to chrome. Nickel demand can collapse if the price moves too fast, much more rapidly than any other metals.

So why has nickel soared whilst copper has slumped? Well Indonesia has banned exports of raw mined products which have been interpreted – there is a debate – as banning unprocessed nickel exports and it is a major supplier. You have also had events in Russia that have made some worry about sanctions on Norilsk. But these are all relative storms in a small tea cup and very soon the historical boom and bust of the nickel market will reassert itself.

If you really want to play this trade then buy the palladium ETF. 70% of supply comes from Norilsk and the balance from a South Africa that remains resolutely on strike with the prospect of months being required once the strike ends before normal production can be resumed. Add to this the launch of physical ETF in SA which if it follows the lead of the platinum ETF launched last year will quickly soak up several thousand ounces of metal plus the general consensus that the market will be in deficit this year and TMM thinks you have a way of playing on a field with the odds tilted much more in favour than you would get by dabbling in nickel!

-Lardboy
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Anonymous
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March 27, 2014 at 1:25 PM ×

I don't really understand your arguement. Isn't the indonesia ban more of a "sure thing" than any speculative expectation that Russia will not sell palladium b/c of sanctions which haven't happened yet? I understand your point about why the metals are different, but not about what makes one a better long than the other. From what I understand, Russia has been selling upsides for the past week in Pall, and seems to still have plenty of material, whereas Ni Ore prices are still trending higher and there is no reversal to the ban in sight prior to the election in indo, at a minimum. I actually don't hate long ni / short pall - though both are terribly illiquid mkts.

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Anonymous
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March 28, 2014 at 8:44 AM ×

Nice one, Lardboy. I know basically nothing about metals and metals trading so the insight is highly appreciated.

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