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Nickel ETF Soars: What's the Driving Force?

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Matching the market speculations that expected the ban on export ores to be preponed, Indonesia recently confirmed the move. The country has decided to expedite the export ban on all grades of nickel ore, two years earlier than previously announced, i.e. from Jan 1, 2020 onward. Per the energy ministerial decree, existing nickel ore shipment recommendations with content under 1.7% will be allowed to be carried out until  Dec 31.

Accordingly, there has been a surge in nickel prices. In fact, the iPath Series B Bloomberg Nickel Subindex Total Return ETN (JJN - Free Report) has already gained 14.4% in the past month. Goldman Sachs is expecting the nickel prices to rise to $20,000 a tonne in three months. This compares favorably with the current price of $18,128 a tonne as of Sep 11 (read: Best and Worst Performing ETFs of Last Week).

Why the Decision?

Per a rule issued in 2017, the government was planning to prohibit nickel ore exports from January 2022. However, it had to accelerate the embargo for strengthening and establishing its local smelting industries of nickel pig iron (NPI) as well as stainless steel and electric vehicles (EV) battery in lieu of limited nickel reserves. Indonesia will be requiring 81 million tonnes nickel ore supply annually. It currently has a base of 11 working smelters with input capacity of 24 million tonnes of ore. Moreover, it plans to add 25 more smelting units. In this regard, Bambang Gatot Ariyono, the mining ministry's director general for coal and minerals commented, “the national proven reserve for nickel is only 698 million tonnes, which can only supply smelting facilities for 7.3 years”.

Secondly, Indonesia has been seeing investments from companies like QMB New Energy Materials Co Ltd and China’s Zhejiang Huayou Cobalt Company Ltd to build leaching plants for processing limonite ore grading below 1.7%. This will help develop Indonesia’s capabilities to process “low grade” ores locally, thereby raising its domestic demand for the nickel ore.

Thirdly, it is a widely known fact that nickel is required in lithium batteries to power gas-free cars. Meanwhile, Indonesia is planning to become an electric-vehicle hub. In fact some foreign companies like China’s Tsingshan Holding Group are investing in Indonesia’s nickel-battery processing plants. Moreover, Indonesia’s Harita Group and China’s Ningbo Lygend are planning another battery nickel plant. Thus, the decision to impose bars on nickel ore is in tandem with the country’s business plans (read: Is it Time to Buy These ETFs on a Sudden Slowdown in EV Sales?).

To support this decision, Bernandus Irmanto, president director, Vale Indonesia has also commented that "the best limonite ores for electric car batteries are grade 1.4 and below. If the government allows exports for grade 1.7 and below, then we are exporting the best materials for the batteries.”

Nickel Ban: Is it the First Time?

This is not the first time that Indonesia has taken such a step. It had earlier levied the ban in 2014 only to relax the same in 2017 under a quota system. During this period, a rally in the nickel prices was observed as well. Though a price rise was witnessed between 2014 and 2016, some analysts believe that the decision was not very impactful as Chinese NPI producers had effectively turned to Philippine miners within a short span. On the contrary, Mark Selby, principal of Selby & Co, has applauded the 2014 ban saying that “if we step back and look at whether this has been a successful industrial policy for Indonesia, I think the answer to that is a resounding yes.”

Looking Forward

Indonesia stood out as the largest nickel producer globally in 2018. It produced around 560,000 tonnes of nickel. Also, its average production is expected to increase 8.1% between 2018 and 2027. The country is projected to outperform its rival nickel producers like the Philippines and Canada. The ban is likely to create supply shortages of nickel ore and keep the prices high in the global markets. In fact, BMO predicts a nickel shortfall of 51,000 tonnes in 2020 and a deficit of 127,000 tonnes in 2021.

However, the decision to ban has also been criticized by a lot of economists. Some are of the opinion that it reflects the uncertainties related to the country’s mining policies, which can keep foreign investors and miners at bay. The Indonesian Nickel Mining Association has also objected to this action.

Nickel ETF to Shine

iPath Series B Bloomberg Nickel Subindex Total Return ETN (JJN - Free Report) — up 68.1% year to date

The fund provides exposure to the Bloomberg Nickel Subindex Total Return, which in turn, shows the potentially available returns through an unleveraged investment in the futures contracts on nickel. The fund has AUM of $9.4 million with an expense ratio of 0.45%. It trades in three months’ average volume of about 1,500 shares (read: ETFs Winners & Losers Halfway Through Q3).

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