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Nickel to Crash



April 13, 2008 – Comments (5)

Every once in a while I check the LME commodity prices and warehouse levels.  In today's market you simply are working in the dark as to the degree of metals that are out there that are not being delivered to the LME but will ultimately be on the market for sale again, so seeing a low level isn't necessarily an indication of a tight market.  Hedge funds often buy up commodities these days and distort the historical data.

I was shocked when I looked at nickel today and how quickly the storage levels have risen.  Scroll down to the very bottom of the page on the link.  I looked for a long-term graph, but did not find one.  Last year when nickel bubbled to about $50k/ton the storage level was down to it low about 4 days of world supply was recorded in the LME.  In roughly a year the supply is more like about 50 days of world supply. 

In order for the LME warehouse level to increase that much simple math suggests the difference between supply and demand has changed by about 10% in only a year.

Now have a look at the graph half way down the page for the 5 year metal price.  It was $5-6/lb and now it is over $12/lb.  Mines aren't easy to shut down and mine owners often run red ink for a while before they shut down. 

Take a look at FNX mining and you can see that when nickel was $5-6/lb earnings per share were negative.  They may not have been producing then.  However, for 2007 when nickel prices were at a historical record earnings were $1.31/share.  With the level of nickel supply now out there expecting $8-10 nickel is not unreasonable at all, and with that kind of re-pricing earning absolutely implode.  Don't let the quarterly data on FNX fool you, for last quarter it had $13 million in earnings before taxes and $32 million after taxes.  The true earnings for the quarter were about 15c per share and the rest was a tax credit. 

With drastically weaker prices even an aggressive increased production plan isn't going to deliver the kind of earnings many investors are expecting.  Earnings are leveraged to the metal price so expect a leveraged decline in earnings.  Production went up yet earnings from operations went from 41c/share to about 15c/share with the price decline from the $22/lb to about $14/lb.  The dramatic rise in the storage levels means the price is likely to decline further, as are earnings. 

FNX has other metals and I did not look to come up with an estimate of whether they can offset the loss in revenue from declining nickel price, but I have looked at FNX in greater detail in the past and nickel is their greatest price sensivity.

What nickel is showing is what I have been concerned about seeing in all the base metals with a world slow down.  So, although agricultural commodities are boom, others are not necessarily doing the same.  Zinc is showing signs of increasing,  I don't know what to think with copper, or lead

Nickel is the smallest of the world base metal markets and it is easiest for the price to have been spiked so far beyond fundamentals as it was last year.

Hedge funds are out there manipulating the price of everything and it means that price retractions can happen faster than you expect. 

5 Comments – Post Your Own

#1) On April 13, 2008 at 11:14 PM, abitare (29.54) wrote:

Hedge funds are out there manipulating the price of everything and it means that price retractions can happen faster than you expect.


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#2) On April 14, 2008 at 12:02 AM, dwot (28.88) wrote:

I was just looking back here.  When you scroll to the bottom to the 5 year chart, it was spring 2007 that price peaked.  There's about 12 times more nickel availible for sale there now then in the spring of 2007.

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#3) On April 14, 2008 at 12:05 AM, dwot (28.88) wrote:

Nikkei down 3.5% again...

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#4) On April 14, 2008 at 1:11 AM, Energypartners (96.64) wrote:

Yo dwot;

I own some ZINC. The LME warehouse level are up 25% over the past year, and the price of zinc has fallen. But look at the 5 year warehouse levels. WOW what a huge drop!. Also I like the fact that zinc is used in so many areas, including agg. ZINC has some nice hedges for 2008, so It looks pretty safe.....

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#5) On April 14, 2008 at 1:42 AM, dwot (28.88) wrote:

bellard, don't forget metals are priced in US, so zinc is half of what it was US, and then another 20% down because of exchange.

I've been wanting to see how the zinc players come in.  One thing about them is the never got to insane bubble level P/Es.  They got into the 8 to 10 range so there was some room for price declines, but with the amount the price came down, well, their P/E's are like fairly high once the price declines are priced in.  I liked the 8-10 P/E range not necessarily because I thought it was the best price, but more because it gave lots of room to exit without taking a massive hit should the prices tanks. 

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