HardAssetsInvestor

Written by Brad Zigler  |

May 27, 2010

Nickel Vs. Aluminum: Which Shines Brighter?

Details

This week, a survey of the commodities markets yielded precious few prospects for turnaround trades. There were just two standouts in the base metals sectors—nickel and aluminum.

If you overlaid a daily chart of the cash LME nickel market on that of LME aluminum, you'd scarcely see a difference in nickel's and aluminum's price trajectories over the past year. Except for a short-lived divergence between November 2009 and March 2010, aluminum and nickel have traded in virtual lock step with one another. That's reflected in the current 67 percent correlation between the Dow Jones-UBS Aluminum Subindex and its nickel counterpart.

Yet, despite the recent similarities between the two markets, nickel investors have handily outgunned aluminum buyers. The one-year return on the iPath Dow Jones-UBS Nickel Total Return Sub-Index ETN (NYSE Arca: JJN) is now more than double that of the iPath Dow Jones-UBS Aluminum Total Return Sub-Index ETN (NYSE Arca: JJU).

Cyclically, nickel's closer to a top, while aluminum seems to be ripening for a more bullish turnaround.

A Tale Of Two Metal ETNs: JJU Vs. JJN (Closing Prices Only)

Performance Characteristics As Of 25-May-10

Fundamentals

As you might surmise from the chart, fundamentals for nickel have been more bullish to date. Most significantly, there's a decreasing supply of nickel. In the last month alone, LME warehouse stocks have fallen 5 percent, or 7,278 metric tons.

A primary use of nickel is the manufacture of stainless steel. China's been a leading consumer of all things nickel and is likely to compete for supplies with recovering U.S. industrial demand.

Aluminum stockpiles, in contrast, have been rising recently. LME stocks have climbed 15,750 metric tons, or 0.3 percent. Over the past year, stores have seesawed from the 4.2 million-ton level to 4.6 million tons.

China figures into the aluminum equation as well, but more as a source. The People's Republic is the world's largest producer.

So, for both metals, China's the wild card.

And, for any U.S. investor considering a direct investment—short or long—in nickel or aluminum, careful consideration should be paid to the exchange-traded notes tracking the metals' performance.