Dividends and Nickel faces severe squeeze amid low inventory

In the commodity business, if you own the commodity you love to hear there is a short squeeze because short squeezes means higher prices. That scenario is playing itself on the London Metal Exchange (LME) for nickel. Prices have increased to over $24,000 a tone for the first time since 2011.

The squeeze is going on physical delivery.

In an article of Andy Home of Reuters, the nickel market is in a tight squeeze which eventually leads to higher prices for the uses of nickel. There are 2 markets for nickel – stainless steel and battery for electric cars. (One would suspect that people are working on alternatives to nickel, but we are not there yet).

According to a report from Goldman Sachs, the most significant degree of tightening surprise in balances across the base metals in 2021. The bank was forecasting a surplus of supply of 49,000 tonnes last year, but now estimates a deficit of 159,000 tonnes.

JPMorgan analysts project nickel usage in batteries to grow by 50% year in year in 2022, taking over from stainless steels as the biggest driver of demand growth.

In terms of supply, a new mine in Indonesia will help. What would not help is the issue of Ukraine and potential sanctions if Russia crosses the border. Russia is a major producer of nickel, aluminium and palladium.

The last time the market was in a short squeeze was in 2007 when the price of nickel went to $50,000 a tonne.

Linking to dividend paying stocks, if you own stocks when there is a short squeeze it is wonderful because prices rise. Trying to play the squeeze can be expensive because in markets, with high prices company look for alternatives to bring the price down. For those who remember high steel prices meant automobile companies starting using more aluminum in the manufacture of vehicles. If you own the stock and the price rises, ensure you take profits and look at alternatives. Eventually the price will fall and you can buy back into the stock at a lower price.

There are more questions than answers, till the next time – to raising questions.

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