Fire and Fury? Markets Don’t Care

0.22%, 0.17% and 0.04%.

That’s how much the S&P/ASX 200, Dow Jones Industrial Average and Nikkei 225 fell respectively on Thursday on the back of Trump’s ‘fire and fury’ tweets in relation to North Korea.

South Korean markets, on the doorstep of any potential flashpoint, clearly weren’t worried about an imminent war. The Korean Stock Exchange fell 0.38%.

Given all the talk of war coming from the media, you’d think there would have been a little ruffling in the markets.

If indices don’t even crack falls of 0.5%, you can assume that the market doesn’t care, and that it’s got other things to worry about.

What I’m calling a ‘war metal’, on the other hand, jumped 4.18% according to the London Metal Exchange. Overnight, nickel prices went from US$10,250 per tonne to finish the session at US$10,705.

As I explained yesterday, nickel is an essential metal to virtually any weapon or machine in use by the military. In fact, 20% of all nickel consumed ends up in aerospace or military applications.

However, the recent nickel price rally — up 17% in the past month alone — may be a case of the base metal catching up to the price rally in other industrial metals, as Bloomberg reports:

Industrial metals such as copper and zinc have rallied more than 30 percent in the past year, nickel is little changed with prices averaging just US$9,795 in 2017 as Indonesia lifted some restrictions on shipments, offsetting mine closures in the Philippines. Other companies, including top producer Vale SA, are also reviewing their nickel operations.

In the chart below, Bloomberg shows that there has been significant divergence between industrial metals and the nickel price going as far back as November last year:


Source: Bloomberg
[Click to enlarge]

The pumped-up war-talk is not the real driver of long-term nickel price increases. As 65% of nickel consumption goes towards stainless steel, any rally in the base metal price relies on what China does next.

Earlier in the week, the Chinese steel rebar futures moved to the highest price-point in four years. With lower quality mills being shut by Chinese authorities on the back of environmental concerns, there are worries stainless steel supplies will shrink as we head into the Northern Hemisphere winter. This is important as local states in China are ramping up stimulus measures to support further construction, increasing demand for steel and pushing prices higher in turn.

In saying that, while the first half of 2017 was rough for nickel prices, the second half may be promising. China’s war on pollution certainly helped kick-start a nickel-price rally. However, Business Wire says that this year will see primary nickel output reach 2.06 million tonnes. Up from the 1.93 tonnes last year. They add that this demand should remain in place until 2020.

However, nickel prices in the short term are at the mercy of Chinese demand. Simply because they are the largest consumer of commodities.

Check this out:

The commodities China demands

China commodities

Source: Business Insider Australia
[Click to enlarge]

Here you see that nickel is the fourth most in-demand metal in China.

Furthermore, it’s worth pointing out that China accounts for more than 50% of total global demand for iron ore, alumina, nickel and thermal coal. Throw in the 40% demand for zinc, copper, lead, steel and coking coal, and we have a mighty authority controlling the commodity market.

This insatiable demand for Australian resources will give local mining stocks a much-needed boost.

Nonetheless, even with the nickel price increasing 17% over the past month, nickel mining stocks are yet to follow that trajectory.

Shares in the $600-million-valued nickel miner Western Areas Ltd [ASX:WSA] have only gained 1.27% since early July. At the smaller end of the market, the $105-million-valued Panoramic Resources Ltd [ASX:PAN] has jumped 9% over the same period.

It tells me that, if investors are chasing after the gains available in the nickel market, the biggest gains could be found in small caps.

But you don’t need to know which stock has the right mine, with the right ore quality, and that is closest to getting the metal out of the ground and on a boat to China. Our resource analyst Jason Stevenson has found what he believes to be the best nickel stock on the ASX right now. Details here.


Shae Russell,
Editor, Markets & Money

Shae Russell started out in financial markets more than a decade ago. Working with a derivative brokering firm, she helped clients understand derivative markets, as well as teaching them the basics of technical analysis. Since joining Port Phillip Publishing eight years ago, Shae has worked across a number of publications. She holds the record for the highest-returning stock recommendation, in which a microcap stock returned over 1,200% in six months. Ask her about it, and she won’t stop yapping on. For the past two years, Shae has worked alongside Jim Rickards as his Australian analyst, translating global macro trends for Aussie investors, and how they can take advantage of these trends. Drawing on her extensive experience, Shae is the lead editor of Markets & Money. Each day, Shae looks at broad macro trends developing around the world, combining them with her distaste for central banks and irrational love of all things bullion.

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