Commodity futures, nickel mining stocks among ways for investors to ride nickel rally

INVESTOR interest in nickel is heating up, giving birth to a new nickel miners exchange-traded fund (ETF) last week and allowing Indonesia’s capital markets to defy negative sentiment and launch two nickel-related initial public offerings (IPOs): Merdeka Battery Metals and Harita Nickel.

Jim Rogers, an investor known for creating a commodity index in 1998, believes nickel prices still have room to run, especially since supply is unlikely to be able to keep pace with demand.

China and certain countries in Asia have been pushing for the use of electric vehicles (EVs), said Rogers, adding that EVs need more nickel than petrol-powered cars.

“No one has been opening nickel mines for a long time … so the longer-term dynamics for nickel are solid,” he said.

Buying into nickel futures, as well as scooping up shares of nickel companies, are “two of the better ways” that investors can buy into the booming industry, said Rogers. In particular, futures could give investors opportunities with “good leverage”.

As with all investments, however, Rogers said investors should do their research and “know what they are doing” prior to putting their money into the markets. 

Nirgunan Tiruchelvam, an analyst at investment firm Aletheia Capital, said the “purest” form of buying into the sector would be ETFs as well as commodity futures.

“If one were to have a choice between buying into ETFs and futures versus buying shares of nickel stocks, you’d be investing more directly if you bought ETFs and futures,” said Tiruchelvam.

He warned that there are certain risks associated with buying shares of stocks with exposure to the nickel industry. For instance, a company could go bankrupt if its hedging is “mismanaged” – even if there is a rally in nickel prices.

That being said, Tiruchelvam stressed that investors should not shy away from equities altogether. In the previous nickel rally, from 2004 to 2008, he noted that nickel producers did better than the futures. “There is better upside in companies, but there are also risks,” he said.

He recommends London-listed Glencore, which is a leading producer of nickel. The Switzerland-based miner and commodity trader’s adjusted earnings before interest, taxes, depreciation and amortisation rose 60 per cent to a record high of US$34.1 billion in 2022, primarily due to higher energy prices and the Russia-Ukraine war. The stock, however, is down 18.2 per cent year to date.

For South-east Asia, Indonesia is one country that analysts think will benefit from the nickel rally.

“Armed with substantial nickel reserves, Indonesia’s ambition to be the EV hub of South-east Asia will help drive its economic growth,” said Henry Wibowo, JP Morgan’s head of Indonesia research and strategy.

“We have seen good progress in the last two years, where the country has signed more than a dozen deals worth over US$15 billion with companies like Hyundai Motor, CATL, among others, to produce EVs and batteries, and build out supply chains.”

CGS-CIMB analysts said in a recent report that while regional investors remain cautious about commodity equities, the potential upcoming metal IPOs are “drawing some interest”.

The brokerage has a preference for stainless steel-grade nickel, known as Class 2 nickel, over Class 1 nickel which is primarily used for batteries, as analysts believe Class 1 nickel’s risk-reward is skewed to the downside.

CGS-CIMB has retained its “overweight” stance on the Indonesian metals and mining sector. It has an “add” call on Indonesia-listed Harum Energy.

“The company would be able to fully transform into a nickel company once all its nickel assets are fully ramped up, or coal price and volume declines,” said the analysts.

The brokerage also has a “hold” call on Merdeka Copper Gold (MDKA). The company in March last year announced a US$374 million acquisition in the nickel mining and refining sectors. Merdeka Battery Metals is a unit of MDKA.

“We think the upcoming IPOs could pose a risk of investors switching or rotating to other metal miners from MDKA,” said the CGS-CIMB analysts, adding that they reckon the “potentially strong execution” of the company’s upcoming projects have already been fully priced in.