Emerging markets contribute half of the world’s GDP — a number that should only increase with time.
You can thank China for that success. China remains a growing powerhouse — the country should double in size over the next decade.
Sooner rather than later, we’ll see a changing of the guard. China will surpass the US as the world’s largest economy. And that means one thing: greater demand for commodities.
China’s population totals over 1.3 billion people — more than enough to fuel its own economy through consumption. That’s why it striving to become a consumer-driven economy. Today, China boasts an investment-driven economy. It grows by importing resources and selling products. But that’s been changing, and will continue to change in the future. As it shifts to become a consumer-driven economy, one resource should benefit the most — nickel.
Unlike most other commodities, China requires nickel regardless of what’s driving its economy — be it investment or consumers. As wealth spreads, people demand a better standard of living. That means more home appliances, vehicles, electronics, new factories and restaurants…all of which are dependent on nickel.
Nickel has lots of potential. But it hasn’t entered a bull market yet. That said, it’s a sector that could potentially make you massive gains today. You just need to back the right stocks.
Chinese NPI production
China is the world’s largest producer and consumer of nickel. Unlike other commodities, such as iron ore, it consumes much of the nickel it produces. In fact, it needs all the nickel that it can get its hands on.
The world’s second-largest economy makes nickel pig iron (NPI). NPI is used in the production of stainless steel. Stainless steel, as you know, is used in multiple consumer goods.
NPI is a cheaper version of refined nickel metal from the London Metal Exchange (LME) warehouse. Refined nickel is quality nickel. To store the nickel in the LME warehouse, it has to meet specific standards. LME nickel is generally 99.99% pure. The Chinese don’t need that kind of percentage, as their NPI uses 4–13% nickel ore. That’s why cheap nickel ore is sufficient for their needs. In other words, the Chinese probably wouldn’t buy from the LME unless there was an emergency.
In the past, China imported most of its nickel from Indonesia. But, as you might know, Indonesia banned raw exports in 2014. That ban was partly relaxed in January. Nonetheless, China has mostly turned to the Philippines for its nickel ore needs since 2014.
Filipino nickel ore is lower quality than Indonesian ore. The average nickel grades are around 1.3%. That compares to Indonesia’s grade of 1.8–2%. That’s not ideal. Think of making stainless steel like cooking — the better the ingredients, the better the food. That’s why, using Filipino nickel, China produces lower-grade stainless steel. But, as the saying goes, beggars can’t be choosers.
Thankfully for the Chinese, Philippine exporters have been quite generous with their exports. And the world’s second-largest economy hasn’t experienced a nickel shock…yet.
What happens next?
The Gulf Times reported on 5 August:
‘The nickel price has rallied by almost 18 over the last month. The London Metal Exchange (LME) three-month nickel was trading below the $8,900-per tonne level on July 10.
‘It has this morning recorded a five-month high of $10,445. Fund managers who fled the market in April and May have returned.
‘The inference is that while some fund managers were still exiting the market, others were being drawn in by bargain-basement prices.
‘Their fundamental reasoning is that such low prices will force supply to exit. Particularly the supply of nickel pig iron (NPI) feeding China’s giant stainless steel sector.
‘And most particularly the new flow of NPI from operators in Indonesia. It’s helped that the Philippines government has been sending mixed messages as to what it intends to do with its nickel mining sector, still reeling from the onslaught launched by short-lived environmental secretary Regina Lopez.’
Remember, the Indonesians have only partly relaxed their ban. And while that could easily change, it’s not worth the time or energy speculating on when Indonesia might remove the ban entirely. That means, given the nickel environment, it’s likely the Chinese will keep relying on Filipino nickel ore in the near-term future.
That raises a small issue…
The Philippines shut down most of their nickel ore mines late last year. That led to a lot of controversy, which resulted in Regina Lopez getting the sack.
There’s now a new environmental minister in charge — former military chief Roy Cimatu. But he told reporters on 31 July that there’s ‘…No need to rush. We have to review voluminous documents. I need to look at all the evidence that the companies gave us.’ In other words, Cimatu is in no rush to re-open the shut mines.
That’s why the nickel price has again gone nuts. Take a look at the six-month chart below:
Source: Kitco Metals
[Click to enlarge]
The bottom line: Don’t concern yourself with whether the trend will last or not. Nickel prices are surging today. I believe the time to buy — if only temporarily — is now. Massive gains are potentially on offer if you buy the right stocks. In fact, I’ve found what I believe is the best nickel stock on the ASX. Check it out here.
For Markets & Money