Darcy Keith
RTGAM



Nickel is often nestled in the shadows of better-known metals such as copper and gold, but Desjardins Securities Inc. believes the silvery-white lustrous commodity is where the buying opportunity lies for investors right now.

Since peaking at $9.90 (U.S.) a pound on Feb. 9, the nickel price has declined 24 per cent to $8, which is just below where it started the year. It's a pretty shabby performance considering the London Metal Exchange Index, made up of six industrial metals including copper and aluminum, is up about 7 per cent year-to-date. Nickel, in fact, is the only major metal that is trading below exit levels for 2011.

Desjardins analyst John Hughes believes there could be several reasons for this. Some traders may be doing some profit-taking after a rally in January, for instance, and markets may be feeling less bullish given that nickel prices remain above the marginal cost of production.

But there are signs nickel is heading for an upswing. For starters, the price for nickel on the London Metal Exchange is currently trading at or even below domestic prices in China. Eventually, this will make buying Western world-produced nickel, priced through the LME, more attractive than buying domestically in China, Mr. Hughes points out.

In addition, current nickel prices are below cash production costs for several Chinese producers of pig iron, a lower-quality but abundant product that has increasingly competed with Western nickel supplies. The more favourable pricing of Western nickel relative to pig iron may encourage the Chinese to import more nickel, he says.

There are also signs stainless steel demand - which accounts for two-thirds of the end use of the metal - may soon rebound. The latest data suggest stainless steel distributor shipments were up 6 per cent in January versus a year ago and inventories have declined over the same period. Inventory-to-shipment ratios are currently at 18-month lows.