Are nickel prices looking undervalued at the moment?

Nickel prices have dropped 23% over the course of the last 12 months to a low of $15,800 a tonne in February. Since then, supply issues and sanctions have pushed them up above $21,000/t only for prices to drop back to $17,800/t this week.

Nickel prices are volatile at the best of times and that is even more the case when supplies start to go awry as they did in the second quarter of this year.

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There are a lot of negative comments being bandied around the metals trading market about where nickel prices are expected to end this year but we believe that some market watchers have underestimated the long term impact of a ban on Russian supplies. They also look at nickel demand mainly through the prism of EV battery demand as the fastest growing nickel-consuming sector, underestimating how the slowly easing inflationary environment will impact demand growth from other industries such as stainless steel, alloys, armour, propeller shafts and turbine blades.

The New Caledonian factor for nickel prices

Common wisdom says that Indonesia, the largest producer of nickel, is creating an oversupply of the metal that will keep a cap on prices. Indonesia, which produces more than the next three nickel producing countries (Philippines, Russia and New Caledonia) put together, is oversupplying Chinese nickel smelters who are their largest customers and those customers are cutting down on their purchases. However, the fact of the price formation is that large portions of production are already spoken for in terms of long-term contracts and that the exchange-based price is affected by changes in marginal production.

New Caledonia’s processing of nickel has almost ground to a halt over the past few weeks following large scale riots triggered by France voting through changes to electoral regulation. Riots have stopped the largest nickel producer SLN, owned by France’s metals firm Eramet; it is still running its smelters at minimum capacity while two other local producers have completely stopped smelting, Prony Resources because of security reasons and KNS for lack of profitability.

With France currently embroiled in its own political turmoil, the controversial electoral reform in New Caledonia has been postponed and is unlikely to come back on the agenda over the next quarter.

The LME and Russian sanctions

On top of that, in April the UK and the US banned the delivery of Russian metal into COMEX and the LME. The move didn’t come as a total surprise either to traders or to Russian producers, with the latter offloading a lot of metal in anticipation of some form of sanctions.

While this has led to a build-up of Russian supplies in LME warehouses in the months preceding the restrictions, the question now is what will happen with Russian metal once those supplies are run down? Russian nickel could, like most of the country’s gas and oil, find its way into Asia, but the ban will definitely obstruct the established flow of supplies.

On the demand side, nickel prices weakened in 2023 and in the early part of 2024 in anticipation of high interest rates putting a dampener on sales of EVs, a large consumer of nickel. But nickel has much broader uses, for instance stainless steel, other alloys, propeller shafts and turbine blades, which will be less affected by changes in inflation and interest rates.

Most other industries that are end users of nickel are expected to show stable growth over the coming year keeping overall demand strong.

The current dip in nickel prices could therefore create an interesting entry point in the market rather than being an indicator of future lower prices.

WisdomTree Nickel ETF