Play The Soaring Nickel Price With Glencore Xstrata PLC

If you’re like me, you’re finding investment profits harder to come by this year compared to the last.

And with the FTSE 100 flat year-to-date, there are a lot of us in the same boat.

One group that isn’t complaining, however, are the small number of hedge fund managers and commodity traders who fancied the chances of nickel back in January, and who backed their hunch on the metal with their money.

Yes, nickel.

Not gold, not silver, and not those sexy growth stocks which have fallen anything from 20-50% or more in recent months.

Not a nickel and dime rise

You see, the price of nickel has risen by over 30% in 2014, to $18,250 a tonne. Some traders and analysts are forecasting it could almost double from here to 2016.

Now, outrageous predictions of price rises and slumps are not unusual in the commodity sector — and nor for that matter are outrageous rises and slumps! It’s a market dominated by traders and speculators, where prices are set at the margin. That means prices can move quickly when supply and demand dynamics change.

However, accurately matching predictions with this volatility is another matter. How many people have you heard calling for a recovery in the gold price in the past year, for instance? One often gets the feeling such forecasts are based more on how much gold the forecaster currently owns than on any rational reason for a rise.

The situation with nickel is different, however, because there’s a specific reason for the price rise.

On 12 January, the Indonesian government banned the export of the unprocessed nickel. Indonesia is the world’s top supplier of high-grade nickel, and while nickel consumers such as China have built up modest stockpiles, in the long run no country can match the quality of Indonesia’s deposits. About a quarter of the world’s nickel production is derived from this Indonesian ore, so a ban on exports has the potential to cause big disruption.

rio tintoIn the medium to long term, the supply will come back on-line. Indonesia doesn’t want to retain its nickel for future generations! It simply wants to capture more of the value-added by nickel processing, rather than export the raw material to factories overseas. In time more factories will be built in Indonesia to process nickel into other alloys, which they will then be permitted for export. That should eventually curb prices.

For now, though, analysts forecast the surplus of nickel of recent years will soon become a deficit, which is great for nickel producers like Indonesia.

The potential for Ukrainian-related sanctions against Norilsk Nickel, a big Russian nickel supplier, aren’t calming nerves or prices, either.

A different option

Hedge funds bet on the nickel price by buying call options. These give the purchaser the right to buy for a set price in the future, which means that as the price rises, the value of the call options heads higher, too.

But while you can directly bet on the nickel price like this via niche ETFs or spreadbets, I don’t really think it’s a sensible thing for most private investors to do. Commodity prices are volatile, and frequently confound the experts. Any easing of the Indonesia ban could immediately see nickel prices slump.

A better bet might be to buy into a big blue chip commodity company that has exposure to nickel, with Glencore Xstrata (LSE: GLEN) probably the best UK play on the metal.

According to its 2013 results, Glencore stands to earn an extra $170 million for every 10% rise in the nickel price. Even for a company of Glencore’s size, a 30% move in the nickel price is therefore quite significant.

Indeed, Glencore recently told shareholders that the Indonesia nickel ban has “potentially transformed” nickel’s outlook.

Better than BHP Billiton

True, nickel only generated about 1% of Glencore’s profits last year, but that was when the nickel market was languishing in the doldrums.

Moreover, even 1% is a more meaningful contribution from the metal than you’ll get from rivals like BHP Billiton or Rio Tinto.

Glencore is an interesting company as well, because it has a large trading arm as well as its traditional mining business. This means it has more than one lever to pull to exploit sudden shifts in a market like the one we’re seeing with nickel.

And unlike with a commodity ETF, you’ll enjoy a nice dividend yield for holding Glencore’s shares — a yield that’s forecast to hit 3.6% for today’s buyers.

Of course, an income investor should spread their money between different companies and sectors, rather than putting too much faith in the notoriously cyclical commodity sector for their future income. To learn more about securing an income stream from dividends, download our free report now!

Let's face it, hedge fund managers might have to bet on swings in commodity prices to try to generate profits for their investors, but the average person saving for retirement is better off outsourcing such wagers to the top brass at companies like Glencore Xstrata and leaving them worry about how to fund a stream of dividends for their shareholders!

Owain does not own shares in any of the companies mentioned.