Nickel was the worst performing commodity in 2015, down 43% to around $8,600 per tonne. Worries over weak Chinese demand for stainless steel (manufactured from nickel) coupled with robust supply growth has been behind the falls. Nickel is also the top pick for gains in commodities by many investment banks setting out their stall for 2016. Many believe that the scale of the price falls have wrought such devastation on the margins of producers that supplies will be cut faster than the market expects.
The latest evidence from China however is that with demand remaining weak, nickel stocks are rising. Meanwhile, current levels of cutbacks from Chinese nickel producers are proving ineffective in supporting the price. The experience of most mined commodities since 2011 is that production cutbacks, when they are announced are token offers with miners not wanting to give a free ride to other producers – accentuating the scale of the price declines.
Intuitively it makes sense that the commodity to see the largest fall in prices also has the biggest potential for gains – the cure for low prices being low prices. Mean reversion is a powerful thing in everyday life, commodity markets included but just because nickel saw the largest falls in 2015 does not necessarily mean it will necessarily have the most to gain in 2016.
Although a bit dated research published in 2004 analysed the existence of mean reversion in six base metals (including nickel) using price data between 1993 and 1997. Researchers from the National University of Singapore found evidence of mean reversion in all of the base metals, although the magnitude of mean reversion was greatest in copper prices, while the least mean reversion was present in nickel prices. For example, 40% of a copper price shock is expected to revert to its long-run mean over the subsequent year, on average; whereas only 10% of a nickel price shock is reversed.