Investing in Nickel via Futures Contracts - dummies

Investing in Nickel via Futures Contracts

Nickel is a ferrous metal, which means it belongs to the iron group of metals. Nickel, which is traded on futures markets, is an important industrial metal that is used as an alloy with metals such as iron and copper. The commodity is sought after because of its ductility, malleability, and resistance to corrosion.

One of nickel’s primary applications is in the creation of stainless steel. When steel is alloyed with nickel, its resistance to corrosion increases dramatically. Because stainless steel is a necessity of modern life, and a large portion of nickel goes toward the creation of this important metal alloy, you can rest assured that demand for nickel will remain strong.

As you can see from the following table, although there are a number of important uses for nickel, the creation of stainless steel remains its primary application.

Nickel Consumption by Sector
Sector Percentage of market consumption
Stainless Steel 65%
Non-ferrous alloys 12%
Ferrous alloys 10%
Electroplating 8%
Other 5%

Source: London Metal Exchange

Australia has the largest reserves of nickel, and its proximity to the rapidly industrializing Asian center — China and India — is a strategic advantage. Another major player in the nickel markets is Russia; the Russian company Norilsk Nickel is the largest producer of nickel in the world.

Nickel mining is a labor-intensive industry, but those countries that have large reserves of this special metal are poised to do very well. Check out the countries with the largest reserves of nickel in the following table.

Largest Nickel Reserves, 2004 Figures
Country Reserves (Thousand Tons) Percentage of Total
Australia 48,611 25.1%
Russia 24,625 12.7%
Indonesia 22,491 11.6%
New Caledonia 13,863 7.1%
Canada 13,074 6.7%
Cuba 11,640 6.0%
Philippines 9860 5.1%
Papua New Guinea 8903 4.6%
Brazil 6960 3.6%
China 550 2.8%

Source: U.S. Geological Survey

The London Metal Exchange (LME) offers a futures contract for nickel. The nickel futures contract on the LME provides you with the most direct access to the nickel market. It trades in lots of 6 Tons, and its tick size is $5.00 per ton. As with zinc, it trades during the first month, in addition to 27 subsequent months.