Shifting Energy: Uncovering Big Opportunities and Demand in Nickel for Investors

June 25, 2024 | 14 mins 34 secs 

In this episode of Shifting Energy (Season 1), Thalia Hayden of @etfguide talks with Steve Schoffstall, Director of ETF Product Management at Sprott Asset Management, about the nickel growth story, what's driving it and the investment opportunities now and ahead.

For the latest standardized performance and holdings of Sprott Nickel Miners ETF, please visit the individual website page: NIKL. Past performance is no guarantee of future results.

Video Transcript

Thalia Hayden: The fast-moving global energy shift is on, driving demand for critical minerals like nickel. On today's episode of Shifting Energy, we will examine the nickel market, tell you about ETFs, track it and discuss the underlying factors that have turned nickel into a high-demand commodity. Stay with us.

I am Thalia Hayden with ETF Guide. It's great to have you joining us. Welcome to Shifting Energy, an original episode series that keeps you on top of big changes in the global energy transition. Today's focus is nickel. It's a versatile metal that plays a critical role in various industries, from aerospace to battery manufacturing and even physical coins. Nickel has many favorable properties, and it's sought after for its corrosion resistance and high melting point capabilities. So, what is nickel's present and future role in the global energy transition, and how can you position your investment portfolio to participate? Here to discuss that and more, Steve Schoffstall, Director of ETF product Management at Sprott Asset Management. Steve, welcome back.

Steven Schoffstall: Thanks for having me.

Thalia Hayden: Let's get started here. Nickel is playing an important role in the global energy transition. It's also a versatile metal used in many industries due to its attractive properties like high melting points. What are some common things in places where nickel is being used today?

Steven Schoffstall: It has become one of those invaluable parts of our modern society, and given its high resistance to heat and corrosion and its ability to be easily cleaned, it does fit a lot of parts of modern society that people might not even realize it's a part of their daily life. If you look at the biggest use, the primary use is stainless steel, which makes up about two-thirds of all demand for nickel. You see that in your pots and pans and all aspects of industrial and manufacturing processes. You see it being used a lot in tools because it is a strong metal. You see it in car and jet engines because of that high resistance, corrosion and heat. Things like lithium-ion batteries increasingly use more nickel to increase the drivable range. Because of those anti-corrosive properties, we see it in other parts of energy generation, from nuclear energy to oil and gas. And we do see it used in coins. I would say one of the areas that we're starting to see pickup usage would be as it relates to the EV batteries. Adding nickel to lithium-ion batteries increases the energy density, increasing the overall drivable range. So, for places like the United States that are very car-dependent, this will become an increasingly important part of the transition from gas-powered cars to EVs as we move out in the coming decades.

Thalia Hayden: Very interesting. How does the size of the nickel market compare to other metals, and what countries are the biggest suppliers?

Steven Schoffstall: It is one of the largest mine metals out there. It comes in number six. If you start to rank it, it comes behind things like iron ore, copper, gold, silver, zinc, and then you'll find nickel slides quite nicely in there. It does have some similar dynamics to what we see with some of the other transition metals, like lithium and copper, in that the production is very concentrated. For example, if you were to look at lithium, you'd see it's very concentrated in places like Chile. When you look at nickel, Indonesia is the primary location where nickel is being mined. About 50% comes out of Indonesia. When we start moving down the list, you'll see the Philippines drops all the way down to about 10% production. We see Russia, New Caledonia and Australia on that list. And to give you an idea of how big Indonesia's lead is, if you were to look at the available resources within countries, Indonesia and Australia have about the same available nickel reserves, yet one produces 50%.

In Indonesia's case, the others only produced about 5%. We also see among some of these five countries that some social and economic risks could really find their way into the supply chain. Suppose you were to look at Indonesia, for example. In that case, much like they've been doing everywhere, it seems China's been getting close to Indonesia for the last two decades as they try to corner various aspects of the critical minerals market. One of the things that Indonesia has done to spur investment is requiring that a country or a company doesn't just come in, mine the material, and send it home for processing. They require countries to come in and help build up their supply chain. We see China doing that one, given the amount of reserves in Indonesia, and then second, how close it is to China. When you start to look at Russia, that's quite an obvious example of some risk to the supply chain.

In late April, the U.S. and UK banned nickel imports and prohibited metals exchanges from accepting Russian nickel. So that's about 7% or so of the nickel that will come out of the UK and U.S. market. More recently, New Caledonia, a small island near Australia, has been established. It's a French territory. There's been some rioting going on there recently in recent weeks. Part of that is because of the plans of the French government, where they announced that they want to mine the nickel, send it back to the EU for processing and distribute it within the European Union. As this nickel is a source of their economic wealth, the residents there aren't too happy about this. And we've seen some unrest there as well.

Thalia Hayden: Yes, we have. Now, you touched on this a little bit. Let's talk more about the market trends in nickel. What factors are driving nickel demand and growth the most do you think?

Steven Schoffstall: We have the everyday uses we discussed, such as stainless steel tools and those types of things. But I think once we look forward, the two areas where we start to see nickel getting a lot more demand would be one from the energy transition. And the other is from technological advances. If we look at the energy transition, this is related to that EV growth story, and on a global basis, we saw about a 23% increase in global EV sales last year. That's down from what expectations were, but very strong growth. We anticipate that as the EV market continues to iterate, get new competitors, and move forward as we progress during the energy transition, we will expect significant growth from that aspect. Another more recent story that is emerging is related to technology, data centers, and AI.

AI requires these vast data centers that use a lot of computational power and lots of energy to power these large data centers. One of the things that they need during periods when they might not have excess energy if they're using solar or there are other infrastructure problems is battery backups. And what we're seeing a lot of companies are starting to look at is that instead of looking at certain battery chemistries, they are now looking at the nickel-zinc battery chemistry. It provides a much denser battery, which means it takes up less space, which is at a premium inside these data centers and can operate at a much higher temperature. So because of this, these data centers can significantly reduce their cooling costs. So I think those are two aspects where we can see nickel getting increased demand as we move forward.

I would say that in terms of the supply and demand aspect, as we look at it as a whole, we're currently oversupplied in the nickel market. We've seen the miners pull back their production somewhat here in recent months. We would expect that oversupply to sit here for the next few years, but as we move through the rest of this decade, we expect to see a decline in the overall nickel supply as we get closer to 2030. At the same time as we see this decline, which appears to be steady through 2050 according to projections, these increases in EV and data and AI centers, we expect to increase the demand, at which point we'll flip to a supply deficit for the foreseeable future.

Thalia Hayden: Now, switching gears a bit, the Sprott Nickel Miners ETF is an easy way for financial advisors and investors to get exposure to nickel. How does the fund work, and what does it hold?

Steven Schoffstall: It is a great way to get exposure because you can trade it just like a stock or any other ETF. The ticker is NIKL or nickel. As we refer to it internally here, it tracks the NASDAQ Sprott Nickel Miners™ Index, which is an index that we co-created with NASDAQ. As part of this process, we wanted to provide the only ETF that provides focused exposure to nickel. So, while you may have other ETFs with some nickel exposure, the whole purpose of this ETF is to provide exposure to those nickel producers, the miners, and the exploration development companies. The strategy is pretty simple and straightforward. So, twice a year, we go through an analysis process where we rebalance the index, and our whole goal is to provide a pure-play investment strategy. What that looks like to us is that our goal is to have the constituents that are in the index, at least 50% of their revenue or assets tied to mining nickel or the exploration of nickel.

In the case of the nickel market, it's relatively small. The ETF holds about 22 names. With that, we do have to broaden our 50% or more criteria. Three names fall into 25 to 50% of their assets dedicated to nickel. We do bring that down a little bit, although we cap the exposure there. Another thing that we do as it relates to the construction of the index is we don't have any China bias, which means that we don't invest in mainland China and this is an international fund. There's no real direct exposure to the United States. When you start looking at the exposure and start looking at the top, 80% of the fund is allocated to Australia, Indonesia, and Canada. Given the size of the nickel components, we see that about 60% of the fund is mid-cap, and the remaining 40% will be that smaller micro-cap.

Thalia Hayden: Steve, one last question before we let you go here. How do you see investors and advisors deploying NIKL inside a diversified portfolio?

Steven Schoffstall: We see three main uses. One is a commodity bucket. A lot of commodity indexes tend to be underweight nickel or exclude it altogether. We see people add this to their commodity portfolio, or maybe they want to allocate more to nickel than the benchmark they're tracking may be providing. Second, the most common would be that thematic or growth bucket. Thematics and growth tend to go hand in hand. So, as this is an area of the commodity sector that we expect to see significant growth as we move through the coming decades, we're seeing advisors and retail investors allocate there as well. Finally, given its use in EV batteries and the storage of energy, we do see people allocating to energy, which, given that these are all international names if you had a primarily U.S.-centric energy fund that you were focused in, you wouldn't have any real exposure to nickel. So, this is also a great add-on to that side of your portfolio.

Thalia Hayden: You gave us some great information to work with here. We do, unfortunately, need to leave things there, but thank you, Steve, for your insights into the nickel market. Keep up the great work. Thank you. And that does it for today's episode of Shifting Energy. If you enjoyed the show, please tell us by hitting that like button in the comment section below. If you miss previous episodes of Shifting Energy, just hit the Shifting Energy playlist to catch up. To learn more about the investment strategies and ETFs we discussed on today's program, visit sprottetfs.com. I'm Thalia Hayden with ETF Guide. Thanks for watching, and we'll see you next time.