There is good news on the horizon for the average US retail investor. A balloon is coming and for once Joe Investor will miss the boom and crash. Two major stories create the potential for short-term meteoric rise in prices only for the rapid sinking, as macroeconomic forces and political problems stack up. In a world full of financial instruments, global exchange and products ranging from meteorological derivatives to technology indexes to silkworm futures, nickel in base metal is inaccessible to the average US retailer.
Ten years ago, nickel was traded for about $ 11,200 a tonne on the London Metal Exchange (LME). Currently, the market is nearly $ 18,500 per tonne. The 65% rise in prices is almost a perfect correlation to the global GDP growth of the five largest economies in the world over the same period. In general, this makes sense since nickel is used in the nearly 3,000 alloys that we come in contact with daily. The rapid rise in nickel prices this year is not linked to global growth, but the collapse of nickel after the jump will be directly linked to the slowdown in global GDP.
There are two main factors that currently push nickel prices above their core value. The first issue was not a surprise. Indonesia, the world's second-largest producer of nickel, set limits on exports of crude ore this January. The act is intended to stimulate ore processing in Indonesia and boost domestic industrial development. Some discounts have been made on companies with new interior projects already in the works such as Freeport-McMoRan, but even their production is likely to be halved according to their first-quarter earnings report. After all, the world may see a drop in supplies by over 8% in 2014 due to the entry into force of Indonesian policies.
The second factor that is currently pushing nickel prices above their intrinsic value is the escalation of the political crisis in Ukraine. Russia produces about 16% of the nickel in the world. It also produces nickel with a significant cost advantage over Indonesia due to the geological formations in which it is stored. Norilsk nickel dominates Russian nickel production. Norilsk Nickel, like Gazprom, is a quasi-governmental industrial concern that will be on the list of the next round of NATO sanctions, as well as direct US sanctions targeting individual Russian businesses and owners, in particular through banking and tax controls.
These short-term supply problems lie in the macroeconomic picture that continues to predict global slowdown. The Organization for Economic Co-operation and Development has recently released its forecasts calling for global GDP to fall from 3.6% to 3.4%. This is also the second projected decline in six months. Highlights include China's GDP declining from 8.2% to 7.4%. This factor cannot be minimized, given the fivefold growth of the Chinese economy over the last 10 years, which is solely responsible for the 50% increase in nickel prices over the same period. Ironically, Chinese production itself will be a factor in the decline of the metal, as it is expected to increase production by nearly 50%, contributing to nearly 500,000 tonnes of total 2014 production, totaling 1.85 million tonnes. Finally, their increasing production efficiency will allow them to profit even if nickel drops below $ 12,000 per tonne.
Futures markets are based on the delivery of a product at a point in time at a price agreed between the buyer and seller of the product at the beginning of the contract. Physical goods also have storage costs, along with insurance, to cover their storage value. This creates a pricing structure where the longest delivery times have the highest prices due to the associated fees. This pricing structure is called backwardness. The opposite is contango. Contango appears when the price is closer to the long-dated price. This pricing structure is a short-term supply shortage.
The nickel market is currently infested according to the LME rankings. Currently, the current delivery nickel is trading around $ 18,450 per tonne, and the three-month delivery nickel is trading a little higher at $ 18,520. Meanwhile, the December delivery nickel is $ 18,205 and the December delivery nickel. 2015 is almost up to $ 17,805. These prices make it easy to see that the short-term price jump does not reflect the market's prospects for the bigger picture. In addition, the lack of retail access for investors from the US to the LME hampers trading on their stock market.
We have seen that supply disruption creates similar situations here in the US. Typically, excess pricing between intrinsic value and increased market price is fueled by media speculation that ultimately flows to the individual retail investor in Main St. USA. Unfortunately, we've seen retailers jump on the news bar again and again, hoping to make a quick buck, just to end the sinking of the ship when the market turns. These models are easy to look at in the US futures markets due to the Trader Engagement Report published weekly by the Commodity Futures Trading Commission. This report tracks the actual purchases and sales of individual groups of traders – trading, index and small speculator. We track these reports religiously and use them to inform us about the current outlook of the core industry in the respective markets. At least this time, the nickel balloon won't be filled with money for an American summer vacation.