I took off my nickel metal position today, but kept my Norilsk equity. Apparently quite a few others had the same idea since it finished down over 3%.
This was my biggest position in a while, and some of my friends thought I was too early. This is a good example of strategic commodity investing. So let's go through it again.
The spark for the trade came from the 10-year graphs. Nickel was the most undervalued metal in the world I follow. On a closer look, I saw the cost curves put out by the sell side and some consultants. Most of them had about 75% of production losing money. That can't last forever, right. Ok the value is there, but what about the catalysts? Where will they come from? That is what the naysayers meant.
The key here is that if the value is there, and the cost of carry is small, you can wait it out. I truly did not know what was going to make nickel go up, but I knew something eventually would. As it turned out, it was something that neither I nor most others thought would happen. A populist was elected in the Philippines and cleaning up mining pollution is one of his populist ideas. If you had asked me (or probably and other investor) if this could happen, I would have probably said no. The Philippine government was in bed with the mining industry. But it did happen, and the upside was about 35%.
Nickel is still undervalued, but less so. There's a lot of nickel ore on the earth. The Chinese may have to pay a little more for it, but they will get it. Don't expect the Chinese NPI industry to shut down or even contract much. That's not the way China works. They don't shut stuff down; they funnel money into it one way or another. I noticed that they just made a deal with the miner in New Caledonia.
So I don't think the risk/reward of holding nickel and paying carry here is worth it. But Norilsk works the other way. It has a 4% dividend. That I can wait with.