Mr. Goodyear does an excellent job outlining the essence of this base metals bull and many of the underlying factors driving its core strategic strengths. And nickel in particular has been pushed to its recent heights partially due to its rarity as compared to the other major base metals.
As measured by volume, the mined nickel brought to market each year is significantly less than the other major base metals. Aluminum has the highest volume with over 31 million metric tons mined annually, more than twice as much as copper which is the next closest. Nickel ranks at the bottom of these major base metals with mined volume half that of lead measured at 1.5 million metric tons in 2005.
But interestingly, nickel production has not been lagging over the years. In 1994 there was less than 1 million metric tons of nickel extracted from the earth and each subsequent year the volume has incrementally increased. But shockingly a 66% increase in global nickel production over the last twelve years has still come short of fully meeting demand.
According to the U.S. Geological Survey, since 1950 stainless steel production in the Western world has been growing at an average rate of 6% per year. And with Chinese demand continuing to skyrocket since the turn of the century it is no wonder record 2005 mine production still fell short of demand.
Even the conservative International Nickel Study Group estimates there could be a nickel shortfall of over 6,000 metric tons in the first half of this year as other sources cite even more of a spread. As hinted at earlier, the result of this strong nickel demand has led to global warehoused stocks being pilfered down to alarmingly low levels.
This year alone the LME has seen its warehoused nickel supply plunge by a staggering 83% with recent reports showing current supply of less than 7,000 metric tons. This is the equivalent of less than two days worth of global nickel consumption and goes a long way in explaining why speculators and consumers alike are worried about future nickel supplies.
This first chart dissects nickel’s current young bull market, but it is nickel’s recent breathtaking ascent that has us talking about it today. Since November 1, 2005, just ten short months, nickel has climbed a near-parabolic 179% to jaw-dropping levels. Where it will balance and consolidate from here is anybody’s guess, but at worst I believe this recent drive is psychologically preparing consumers to view $8.00 nickel as an acceptable and possibly even cheap baseline.
The first thing you may discover in looking at nickel’s bull run is that this recent parabolicesque upleg was not its first. Toward the end of 2003 nickel exited its orderly ascent and carved its first parabola rocketing 130% higher in just six months.
Nickel was not the only metal to experience this late 2003 price surge and I believe this was the result of what I like to call the China Effect. During these waning months in 2003 speculators finally got a good grasp of the current and future impact China was having on the base metals markets and painted a bullish fundamental picture going forward hence sharply driving up the prices.
But as with all parabolic surges, regardless of the driving factors, there are consequences investors and speculators must bear as euphoria gets out of hand. As is apparent all throughout market history, in order to balance sentiment corrections are necessary even in bull markets. And in early 2004 nickel bled 41% after its parabola reached its apex.
Thankfully in secular bull markets corrections usually do not fully give up the ghosts of their previous uplegs. And since commodities bulls are not driven by concept but rather economic fundamentals, the greater strategic uptrend will grind higher achieving higher highs and higher lows until a sustainable balance for these finite resources can be achieved. So corrections in these types of markets have nary a symmetrical look as compared with their previous uplegs.
With this in mind, nickel provides a prime example of a unique characteristic base metals have shown as their prices thrust higher. Unlike gold or gold stocks, where uplegs are typically followed by corrections that lead to consolidations well below their apex, base metals tend to consolidate in a flag pattern near their top until they are ready to charge forward once again.
After nickel’s early 2004 correction it continued in an uptrend that developed a new support zone just about in line with where its original support was before the parabola. This uptrend though remained inside of a greater trend channel that confined nickel in a sideways consolidation that lasted for over two years. Nickel climbed to just over $8.00 per pound at the apex of this first parabola, and remained in a sideways grind that saw it bounce between $5.00 and $8.00 until it finally broke out in April of this year to achieve a fresh high.
And this latest powerful upleg in nickel is something to behold. It even makes the other base metals look like underperformers! On May 11, the base metals finally looked like they had reached the apex of their second powerful upleg. Since this time, aluminum, copper, zinc and lead have been in a sideways consolidation just below their May 11 peak. But as you can see in this next chart, nickel has taken on a life of its own separating itself from the base metals herd.