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I have to admit that nickel’s chart gives me goose bumps, and I am relieved that I was not on the wrong side of the market during the severe correction that started in 2007. Unlike other metals such as gold, nickel has only industrial use, and its price movements are more aligned with its fundamentals. As such, it’s hardly surprising that its price has plummeted with the current oversupply of the base metal on the market.

if Vale, Canada’s largest mining company, does not experience significant production disruptions due to union labor issues, then Canada’s nickel production is forecast to increase by almost 40% in 2011. Furthermore, analysts expect that Canada is going to increase its nickel producing capacity around 10% per year over the next few years. There are also new projects coming to see the light of day in other parts of the globe, including Brazil, Indonesia and the Philippines.

Nickel is not alone. Aluminium and zinc face the same troubles, which is fantastic if you are a buyer of those materials. However for miners of these overabundant metals they’re likely to be stuck with a declining price over the coming years. The recent modest price recovery developed as a result of increased demand in the aftermath of a global production slow down, and the supply glut could hamper the uptrend very quickly. Also, from a technical perspective, it is not unusual to see a price bouncing from its bottom, recovering about 30%, just to continue its downtrend. Nickel has made such a recovery so far, but the downtrend appears to be still intact.

The severe price correction took nickel from $52,000 per metric tonne in 2007 to currently around $20,000 per metric tonne. When I analyse commodities that have been on a down slope for a while, I ask myself at what point would the producers close their plants? In this case, what is nickel’s breakeven price for mining companies? Newer plants that use nickel have a breakeven operating cost of about $15,000 per tonne, while older (4 years or more) plants have a breakeven around $20,000 to $22,000 a tonne.” Therefore, at current prices, it is still economically feasible to produce nickel, and there remains a little room for its price to depreciate even more.

Nickel is part of the “base metals” family along with aluminum, copper, zinc and silver, to name a few. Simply put, it is one of the metals that we cannot live without. Nowadays, it is mainly used in the manufacturing of stainless steel. As you can see in the figure below, about two-thirds of all nickel goes into that manufacturing process. Other common nickel applications are electronics, such as cell phones or television sets, and chemicals.

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Axel Fredrik Cronstedt, who was looking for copper, discovered nickel accidentally in 1751.  Disappointed, Cronstedt called it “nickel,” which in German means “Old Nick”, because of its silver-white color. “Old Nick” is also the German nickname for the devil. Nickel’s distinguishing properties are its hardness and high melting point, which is almost as high as that of iron.

Nickel Deposits

There are three major producers of nickel in the world and one major consumer: China. In fact, most of the demand increase comes from non-OECD countries, especially Asia with its giants China and India-the usual suspects.

Russia is the world’s leading nickel miner through its behemoth Norilsk Nickel which accounts for 20% of the world’s production. In second place comes Canada, followed by Australia. All of Australia’s nickel production originates in Western Australia at Kambalda, Leinster, Mt Keith, Silver Swan, Cosmos, Wannaway, Mittel, RAV8, Radio Hill and Emily Ann. For Australians nickel exploration started in 1966 when Western Mining Corporation Ltd (WMC) discovered significant quantities of this metal at Kambalda.

Nickel Mining in Australia

Australian nickel is exported primarily to Europe, the United States and Japan. The best represented Australian companies are the household names BHP Billiton (BHP), Minara Resources (MRE) and Xstrata Nickel Holdings.  Xstrata is listed on the London and Swiss Stock Exchanges.  Australian nickel output has been on a rollercoaster ride in recent years. It diminished in 2008 and 2009 due to mine closings and increased in 2010 due to revived demand. Even though Australia’s nickel production is expected to increase even more, to about 177 kilotonnes in the 2010-2011 period, the output will still be below the record figure of 183 kilotonnes in 2005-2006.

Nickel Trading

Nickel has been traded on the London Metal Exchange (LME) since 1979. The chart below tracks the progress of this metal’s price on LME from for the last 10 years. As you can see it has been a downhill battle since June 2007, with a price recovery that it is still being challenged by pullbacks since mid 2009. Of course, more depressed prices will cause mining companies to reevaluate their position and favor other metals instead.

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Should you invest in nickel? I wouldn’t be running to open an account with a broker who has access to LME nickel futures any time soon; however, I would not discount purchasing shares of well diversified mining companies, particularly the ones that extract gold or coal as well.

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