JJN - JJN: Nickel Was The Worst-Performing LME Metal In Q1

2023-04-10 14:20:42 ET

Summary

• Base metals declined in Q1. Nickel led the way lower.
• Nickel volatility has been wild. A rally to record highs on a significant short position in early 2022.
• Nickel is a critical green metal. Climate change initiatives require more nickel.
• Russia is a leading nickel producer and exporter. The war in Ukraine threatens supplies.
• JJN is a nickel ETN that reflects low liquidity in the nickel forward market.

The London Metals Exchange is the home of nonferrous metals trading. Copper, aluminum, nickel, lead, zinc, and tin trade on the LME.

Copper is the leading base metal, and many of the other metals tend to follow copper prices higher or lower. Copper, aluminum, and zinc are the most liquid LME metals, while lead, nickel, and tin tend to experience less volume and open interest. Less liquidity tends to increase price variance as bids to buy disappear during price declines and offers to sell evaporate during rallies.

Nickel has a long history of extreme price variance. While the LME’s most liquid nickel contract is the three-month forwards, the price spreads for nickel for different delivery dates can be highly volatile as they reflect supply and demand factors impacted by logistics, supply and demand locations, and speculative issues.

Nickel is a chemical element with the symbol Ni and atomic number 28. It's a silver-white metal that is hard and ductile. Nickel resists corrosion and is used to plate other metals, like steel, to protect from rust. Nickel is the fifth most abundant element on earth , with Indonesia accounting for most nickel mining.

Base metals declined in Q1

The base metals sector , which includes copper, aluminum, nickel, lead, zinc, and tin forwards that trade on the London Metals Exchange, declined 2.91% over the first three months of 2023. LME nickel was the worst-performing commodity in the base metals sector, falling 20.67% in Q1.

The chart shows that three-month nickel forwards closed at $30,048 on December 30, 2022, and fell to $23,838 per metric ton on March 31, 2023. Nickel was 4.35% lower in early Q2 at the $22,800 level on April 6, 2023, as the selling and bearish trend continued. Nickel far underperformed the rest of the sector:

• LME copper rose 7.45% in Q1
• Aluminum moved 1.47% higher in Q1
• Lead fell 8.11% over the three months.
• Zinc was down 1.68% over the period
• Tin rose 4.14% in Q1

Nickel is no stranger to wide price variance.

Nickel volatility has been wild

The long-term chart dating back to 2001 highlights LME nickel’s penchant for volatility.

The chart highlights that nickel rose to $51,800 per ton in May 2007 and fell to $7,550 in February 2016. In March 2022, as Russia invaded Ukraine, the price spiked to double the level at the 2007 peak when it reached $101,365 per ton. A dominant Chinese market participant with a significant short position caused the explosive rally as Russia is a top nickel producer.

The world’s leading nickel producers are:

As the chart highlights, Russia is the third top nickel-producing country behind Indonesia and The Philippines and ahead of New Caledonia, Australia, Canada, China, and Brazil. The war in Ukraine, sanctions on Russia, and Russian retaliation against “ unfriendly ” countries supporting Ukraine caused the thinly traded nickel market to explode. A substantial short position pushed the price above $100,000 per ton before it ran out of upside steam.

The rise caused turmoil in the Chinese-owned LME, which ceased nickel trading for a while and arranged for a highly contentious lower peak to curb the losses. More recently, in 2023, another scandal hit the nickel market as JPMorgan discovered that 54 metric tons of nickel it purchased and stored in a Rotterdam warehouse, often trusted by nickel market participants, worth around $1.3 million, were hefty bags filled with rocks.

Nickel is a critical green metal

Nickel’s resistance to corrosion at high temperatures has long made the metal critical for stainless steel production. While nickel also is used for armor plating, boat propeller shafts, and turbine blades, it's also crucial for batteries, including the rechargeable nickel-cadmium batteries and nickel-metal hydride batteries used in hybrid vehicles and EVs. Nickel has a long history as the metal of choice in coinage.

Meanwhile, nickel’s role in green energy initiatives turbocharged the demand. Tesla’s Elon Musk recently urged mining companies to boost nickel production as he plans to increase EV output.

Russia is significant for the nickel market

While Russia is the third-leading nickel producing country, it has the world’s fourth most reserves at 7.5 million metric tons. Russian OJSC MMC Norilsk Nickel is one of the world’s largest nickel mining companies. Indonesia, Australia, and Brazil have the three leading reserves.

LME nickel prices surged in March 2022 to over $100,000 per ton on the back of a speculative short position. The peak was unsustainable, and in early April, the price was less than one-quarter of the level at the high. As the demand rises, the thin nickel market will likely resume its upward trajectory after its consolidation.

The chart highlights nickel’s price consolidation between $22,000 and $25,000 per ton in March 2023. After wild price swings in 2022, the metal is forming a base that could give way to higher prices.

JJN is a nickel ETN

The most direct route for a risk position in the volatile and thinly traded nickel market is via the London Metal Exchange forwards. However, accessing the LME is challenging for most investors and traders. Nickel mining stocks such as Brazil’s VALE ( VALE ), Glencore ( OTCPK:GLNCY ), BHP Billiton ( BHP ), and others have nickel and other commodity exposure.

The fund summary for the iPath Series B Bloomberg Nickel Subindex Total Return ETN ( JJN ) states:

At $30.23 per share, JJN had $32.468 million in assets under management. JJN trades an average of 10,706 shares daily and charges a 0.45% management fee.

The chart shows the spike in JJN to $74.45 per share in March 2022 when the LME prices soared above the $100,000 per ton level. JJN is one of the only products that track the nickel price. The LME forwards suffer from low liquidity, translating to thin conditions in JJN. However, over the long run, the ETN will likely move higher and lower with nickel prices, and it is the only alternative to the LME forward market.

The worst-performing commodities during one period tend to recover and become the best during subsequent periods, and vice versa. Nickel led the way on the upside in early 2022 and the downside in early 2023. Demand from China and green energy initiatives could push nickel prices higher over the coming months and years after the consolidation period ends. Below $25,000 per ton, the risk-reward dynamics favor the upside

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