Nickel in Bear Market Territory

Montreal, Canada

From an all-time high of more than $50,000 per ton, nickel prices have crashed 57% since hitting a peak in 2007. Fears continue to grow that Chinese supply will hit the market this year as more mines boost production.

The base metals ranks as one of the worst performing commodity sectors in 2011 along with several soft agricultural commodities like cocoa and cotton. But nickel takes the booby-prize in the base metals arena sporting an 11.5% decline this year.

Nickel did enjoy a spectacular ride before blowing up. The metal surged more than six fold from 2001 to 2007 before collapsing under the weight of the credit crisis. Other metals have also followed nickel south. In 2011, only aluminum is in the black, up 5%.

China is the culprit behind falling prices. The Chinese have activated numerous low-grade pig nickel mines this year and more supply is coming to market. But the threat of too much supply might throw mines into the red as the cost of production neutralizes profits or future plans to boost output. At $21,651 a ton, profit margins are starting to get squeezed.

But the primary producers of nickel show a different story developing.

Judging by the stock chart of the world’s largest nickel producer, JSC MMC Norilsk Nickel (NILSY-OTC), investors haven’t dumped the industrial metal wholeheartedly (see above chart).

Also, Brazil’s Vale Inc. (NYSE-VALE) also depicts a similar stock price pattern showing clear technical support above long-term moving averages. This price action isn’t consistent with a bear market in nickel.

The publicly-traded producers like Norilsk Nickel and Vale might be discounting an end of the nickel bear market. That might portend for a broader recovery in base metals later this summer or fall as growth fears in China fade and the monetary authorities successfully engineer a soft landing.

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