Exchange-traded products linked to changes in the spot price of nickel have soared recently amid reports that Indonesia, the metal’s largest producer, is planning to impose a ban on ore exports.
Aneeka Gupta, Associate Director of Research, WisdomTree.
WisdomTree’s ETFS Nickel (NICK LN), by far the largest and most liquid nickel-tracking ETP, has risen 32.3% between 2 July and 14 August 2019.
The Swiss-listed UBS ETC Nickel USD (TLNCI SW) has recorded a similar return over the same period.
This would not be the first time Indonesia has placed a ban on nickel ore exports. In 2014, the country implemented similar restrictions in a bid to grow its domestic refining industry, although the ban was placed on a five-year hiatus in 2017.
While Indonesia’s current policy still states that restrictions will remain lifted until 2022, rumours have been circulating since the beginning of July that Jakarta intends to reapply the ban earlier, potentially before the year is out.
A lack of clarity from Indonesian officials hasn’t helped the matter, as Aneeka Gupta, Associate Director, Research at WisdomTree, explains, “On 7 August, the Indonesian Director General of Minerals and Coal was reported to have indicated that they are considering the implementation of the ban earlier. However, shortly thereafter on 12 August, a top official of the Indonesian Energy and Mineral Resources Ministry announced to journalists that there were no plans to change the country’s mineral ore export policy, thereby refuting rumours that Indonesia might bring forward the mineral ore export ban.
“The timing of the ore ban implementation will be critical since delays to implementation will allow market participants time to prepare. Given the recent run-up in nickel prices, nickel price could correct in the short term if the ban is not moved forward as anticipated.”
Nickel may also face headwinds from weakening sentiment caused by a slowdown in global factory activity, most notably in the German and Chinese industrial sectors.
This is already playing out in other industrial metals which have all sunk lower in recent weeks. The ETFS Industrial Metals (AIGI LN), which currently provides exposure to copper (40.5%), aluminium (22.5%), nickel (19.2%), and zinc (17.9%) by tracking the Bloomberg Industrial Metals Subindex, has only risen 2.3% over the 2 July to 14 August period despite the rally in the nickel price.
A slowdown in China may be particularly pertinent for nickel’s outlook. The country is the largest producer of stainless steel, a key ingredient of which is nickel. Around 70% of global nickel consumption is used for creating stainless steel.
Escalation of the ongoing trade dispute between the US and China, especially to the extent that industrial growth in the Asian superpower is negatively affected, is likely to have a direct impact on nickel demand, driving prices lower.
Despite the potential for a near-term correction, WisdomTree is bullish on nickel’s long-term outlook.
Gupta notes, “Over the long term, we expect further appreciation in nickel prices owing to the ongoing supply deficit (among the deepest of the base metals) coupled with rising demand from battery technology used in electric vehicles. Nickel is currently a 2.5 million tonne market and likely to rise to close to a 4m tonne market by 2040. Currently, deficits are around 0.3m tonnes. By 2040 the deficit could rise to 1.6m tonnes (based on Wood Mackenzie forecasts) if the pace of mining activity does not pick up.”
Under the hood
ETFS Nickel tracks the Bloomberg Nickel Subindex using synthetic (or swap-based) replication and also provides a collateral return. The index reflects the return of investing in nickel futures that are continuously rolled into the nearest front-month contract. The ETP has $620 million in assets under management and comes with a management expense ratio (MER) of 0.49%,
“ETFS Nickel gives an investor exposure to nickel futures prices and is UCITS eligible,” said Gupta. “Being a synthetic product, the investor does not need to deal with storing the physical metals. As an ETP, the investor does not need to manage rolling the futures contract themselves. Nickel is a smaller and less liquid metal in comparison to copper or gold; however, investing in ETFS Nickel accommodates large creations and provides ample liquidity for investors.”