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Why nickel stocks are up

The share price of nickel mining stocks rose significantly in the Philippine Stock Exchange last week. This was driven by the sharp increase in the price of nickel traded in the London Metal Exchange (LME). The price of nickel is currently $14,860 per ton, up 17 percent compared to its end-June level and up 39 percent compared to its end 2018 level. This is despite the slowing global economic growth, which is pulling down the price of most commodities.

The higher price of nickel in LME is largely due to the steep drop in inventory levels. From 200,000 metric tons during the start of the year, LME’s inventory level fell to 160,000 MT as of end-June and is now down to 149,000 MT. This is equivalent to less than two months’ worth of supply and indicates a potential shortage, according to Jervois Mining executive general manager Michael Rodriguez, as reported by SmallCaps.com.

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A reason for the decline in nickel inventory is growing demand for lithium-ion batteries used in electric vehicles. Note that various groups are projecting demand for electric vehicles to increase by a compounded annual growth rate of more than 20 percent in the next five to 10 years as governments globally are encouraging the adoption of electric vehicles due to environmental reasons. Consequently, demand for nickel used for electric vehicle batteries is also increasing and is expected to account for more than 50 percent of total nickel demand by 2030.

Also causing the drop in LME inventories is increasing demand from China. The output of stainless steel, which uses nickel, has risen to a record high this year despite the country’s slowing economic growth.

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Although demand for nickel is up, supply is down. Due to constant rainfall and massive landslides, access to Indonesia’s Morowali Industrial Park, one of the country’s largest nickel mining sites, was cut off recently.

The world’s largest nickel mining company, Vale, also halted its nickel processing operations at its Onca Puma plant in Brazil this June due to a court order calling for the full suspension of operations at the site because of environmental reasons. This plant accounts for around 11 percent of Vale’s output.

Aggravating supply concerns was a report last week that Indonesia is committed to push through with plans to permanently ban the export of raw nickel ore in 2022 after giving miners a five-year window starting 2017 to build smelters onshore.

Although nickel prices could correct in the near term once Indonesian supply normalizes and as higher LME nickel prices draw out higher inventories from China (stock level currently at a 17-month high of 25,800 MT), any drop could be temporary as demand continues to go up due to the rising demand for electric vehicles.

Meanwhile, supply could drop once Indonesia bans the export of raw nickel ore in 2022. The favorable outlook of nickel prices should boost the earnings prospects of nickel-mining companies listed in the Philippine Stock Exchange, leading to higher share prices over the long term.

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