Why aren't nickel stocks skyrocketing like nickel prices?

The price action for nickel in the past 48 hours has been extraordinary, to such an extent that the London Metals Exchange suspended nickel trading until Friday, 11 March. 

Nickel prices finished February around US$24,000 a tonne, up 20.5% year-to-date. 

A massive short squeeze caused prices to spike to a record US$100,000 a tonne last night. 

Nickel spot prices froze on TradingView just before midnight on Tuesday (source: TradingView)

The response from ASX nickel stocks was equally as shocking, with most names nudging slightly higher.

Nickel stock movements this week:

• Panoramic Resources (ASX: PAN) +11%

• IGO (ASX: IGO) +5.3%

• Poseidon Nickel (ASX: POS) +2.2%

• Blackstone Minerals (ASX: BSX) unchanged

• Mincor Resources (ASX: MCR) -5.4%

• Nickel Resources (ASX: NIC) -29%

Nickel short squeeze explained

A unit of China Construction Bank Corp, one of China’s largest banks, was given additional time by the London Metal Exchange to pay hundreds of millions of dollars of margin calls it missed following an unprecedented spike in nickel prices, according to Bloomberg. 

In simple terms:

• The bank had a massive short position on nickel

• Higher nickel prices forced the bank to close a portion of the short to cover losses

• To close a short, the trader has to buy the asset back, effectively pushing prices higher

• The sheer size of the short kicks off a vicious cycle, 'squeezing' out all short sellers and driving prices higher

Shouldn't nickel stocks skyrocket?

The catalyst behind the monster move in nickel was far from anything fundamental.

Here are a few reasons why nickel stocks have had a muted response to the sudden spike:

• Higher prices is bad for the industry: the electric vehicle and green energy industry is in its infancy, while year-on-year growth is massive, adoption remains low, relative to traditional technologies. The last thing an early-stage industry needs is unaffordable raw materials

  • The average Tesla contains approximately 45 kg of nickel

• Explorers cannot capitalise: many explorers are years away from production and unable to profit from the price spike

• Hedging: it's common practice for commodity-related companies to hedge a portion of their output to protect cash flows from volatile spot prices

  • Panoramic Resources, for example, has hedged 400 tonnes of nickel (at US$19,871 a tonne), worth 57% of its maiden shipment

• Hedging dilemma: if a nickel producer had a hedge in place, but prices kept going up, the producer has a loss on the hedge, even though nickel has theoretically increased in value. If prices stay crazily high, the producer could incur massive losses