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Vanishing nickel may not end the boom

Nirgunan Tiruchelvam
Nirgunan Tiruchelvam3/9/2023 03:29 PM GMT+08  • 4 min read
Vanishing nickel may not end the boom
Nickel mining in South America / Photo: Pedro Henrique Santos via Unsplash
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The MBK mall in Bangkok was a popular destination in the 1990s. People were not drawn to it for its splendour. The building was run-down like the People’s Park Complex in Singapore.

People flocked to it for counterfeit goods. Gucci handbags were identical to the original. They traded at US$50, which was about 3% of the actual price.

The discerning buyers might have spotted the fakes. But, most customers revelled in the forgery. More fake Gucci bags were sold in that mall than real ones in Italy.

The MBK mall may have inspired a scam that has shaken the nickel trade. Trafigura claims that it was robbed of US$577 million of nickel by companies controlled by Prateek Gupta, a metals merchant.

Trafigura is one of the world’s leading commodity traders. Trafigura was supposed to have received the cargo of 1,104 containers with more than 25,000 tonnes of nickel, but the cargo did not contain the metal.

The recipient has not seen the nickel. The cargo inspectors and financiers cannot trace it. It has vanished into thin air. Twenty-five thousand tonnes is roughly the weight of 4,200 elephants. It is unlikely to slip into a pocket.

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The mechanics of the scam are unclear. Trafigura’s due diligence seems questionable. Gupta and his companies are denying the allegations. Litigation is taking place to resolve the issue. This is a brazen crime, if proven. This is not the first nickel scam in recent years.

High trading margins

Fraudsters have taken to nickel with gusto. Nickel has risen 67% in the last five years. The margins from nickel trading at US$25,000 ($33,800) per tonne are at 10-year record levels. The cost of production of the metal is roughly US$9,000 per tonne. This means that gross margins are over 65%.

See also: Russian oil is getting mixed in Singapore and then re-exported, sources say

The metal is highly financialised with a liquid market of US$38 billion.

Singapore was at the centre of a nickel fraud in 2021. It involved Envy Asset Management and Envy Global Trading — commodity traders based in Singapore. Ng Yu Zhi, a director of both firms, was accused of fraud.

Ng, who is 34 years old, had allegedly got the Envy entities to raise money from investors to fund nickel trading. The transactions were fake, it is said. The alleged total fraud amounts to more than US$1.1 billion.

He has been charged with four counts of fraud, with additional charges expected. His assets of $100 million have been seized. The colourful Ng had a penchant for posing in front of his lavish car collection.

Leverage is more powerful for commodities like nickel. The fake trades can be used as collateral for financing. This is much more lucrative than the staid business of trading commodities.

Faking US$577 million of commodity trades requires meticulous planning. If proven, it would be shocking that it evaded the attention of financiers.

Frauds are common during commodity booms. It is a symptom of the extraordinary nickel prices. Nickel’s sudden spurt in 2022 has made it impossible to ignore.

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Nickel is a silver-tinged metal that is found on the earth’s surface. Most nickel is used for steel manufacturing. Less than a 10th of nickel is used for electric vehicle (EV) batteries. But the stampede for the metal is because EV demand is set to rise.

According to Tesla, the world EV market could quadruple in the next five years. If so, nickel demand could rise exponentially.

Indonesia is the largest nickel-producing country in the world. The rapid production of nickel may not be enough.

The case for Nickel’s ascent seems robust. Nickel futures peaked at US$53,750 per tonne in May 2007. The current price is about half the 2007 peak.

Trading the metal directly is a worthy trade. However, the nickel producers may generate better returns. Nickel prices rose five-fold between 2003 and 2007. Trading the companies that produce nickel was even more lucrative. The nickel sector rose eight-fold in that period.

BHP Group is the big daddy of base metals. It has doubled its nickel reserves in the last three years. Other proxies include commodity traders like Glencore. Glencore’s ebitda is set to triple in 2024 compared to 2020, according to the Street. It is at just 3x EV/Ebitda which is an eighth of its level a decade ago.

The stampede for fake bags did not dent Gucci’s prospects. The nickel fraud should not detract the boom of this precious metal.

Nirgunan Tiruchelvam is head of consumer and internet at Aletheia Capital and author of Investing in the Covid Era. He does not hold any position in the stocks mentioned in this column. This column does not constitute investment advice of any kind

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