Putin and Obama continue to face off in the war of nerves over the Crimean Annexation. Last week, Obama released oil from the Strategic Petroleum Reserve. The result was a widening of the spread between global benchmark Brent crude and the U.S. benchmark West Texas Intermediate and an increase in Brent.
As a result, Putin's natural gas and oil supplies become more expensive to his customers since these are dependent on Brent pricing. In any case Putin's European customers might have to purchase elsewhere since Putin can restrict energy supplies. That situation might be short-lived if the U.S. were to lift crude and liquefied natural gas export bans.
Aside from energy, how else could Putin retaliate? One way is to restrict nickel production.
Where does nickel come from?
Two countries supply over 40% of the world's nickel ore: Indonesia and Russia. Indonesia is the largest supplier of high-grade nickel ore and accounts for over 20% of the world's nickel supply. Indonesia has just ordered a ban on all mineral ore exports. For good reason, nickel prices jumped over 3% and reversed a commodity market downward trend.
Next to Indonesia, Russia's state-owned Norilsk Nickel produces about 19% of the world nickel supply. With Indonesian nickel ore down and out for the foreseeable future, Russian nickel production now comes to the front burner. As supply becomes more constrained, even with constant demand for nickel, nickel prices will climb. In doing so, it will simply line the Russian treasury's wallet with nickel profits.
There is not a single mine (yet) in operation in the U.S., and the last of the nickel in the U.S. Defense Stockpile was sold in 1999. Lundin Mining (LUN +3.95%) is developing a greenfield mine in Michigan that is set to begin production in late 2014, promising to deliver 17,000 metric tons of nickel per year for at least eight years.
Who uses nickel?
Among the top 10 nickel consumers in the world, China consumes about twice the amount of nickel of the other nine nations combined. The largest consumer of nickel-bearing steel is Japan, followed by the United States. Of the top 20 stainless steel producers, 13 are Asian, and six of those are Chinese.
The U.S. consumes about 220,000 metric tons of nickel a year, most of it in the production of stainless steel for transportation and electrical equipment. In the U.S. Allegheny Ludlum, a wholly owned subsidiary of Allegheny Technologies (ATI +1.62%), produces nickel-alloy stainless steel and other specialty steels.
The U.S. imports most of its nickel from Canada, then from Russia, Australia, and Norway. About 40% of U.S. nickel consumption is recovered from purchased scrap metal. When alloyed with steel, nickel makes steel resistant to corrosion, thus "stainless."
Nickel and energy?
The European Union is sanctioning Putin and the Russian oligarchs through their Bank Russiya. This will effectively freeze assets. Putin might retaliate by delaying natural gas supplied to the E.U. as Russia supplies about 16% of E.U.'s demand through the Ukraine. Liquefied natural gas (LNG) might be needed to make up the difference.
Just as the Crimea annexation was signed, one of Putin's oligarch colleagues, Mikhail Fridman, closed a deal with German utility RWE to buy its DEA unit's North Sea, European, and North African natural gas operations. If RWE-DEA can't replace the Ukraine natural gas throughput, the shortfall may have to be met with LNG by ocean-going freight.
From the other side of the planet, Japan's Prime Minister Abe just finished an around-the-horn-of-Africa tour. Among other things, he was making sure that Japan has a ready and secure supply of LNG to feed Japan's growth. This will increase the demand for LNG tankers as well. Any company involved in the LNG tanker supply chain should be set to profit.
What is the one commodity needed to ship LNG by ocean? Nickel. LNG ships are hulls with large stainless steel refrigerated tanks. On top of this, LNG tanker shipyards are booked into 2015. This means that there is also a potential shortage in LNG tankers as well.
What's a Fool to do?
Connect the dots. The Crimean crisis caused sanctions to be levied on Russia. These sanctions may cause a restriction of natural gas to Europe, requiring more LNG ocean transport. More LNG tanker ships would need more stainless steel, which in turn would require more nickel.
Indonesian nickel and other ore export bans would give Russia leverage as the new no. 1 supplier. In any case nickel and stainless steel prices would rise with Russian nickel supply restrictions and more LNG tanker demand.
Since it takes time to build tankers and given that about 98% of the fleet is already utilized, tankers will be in short supply. With tankers in short supply freight day rates will rise as well.
I am looking at Lundin Mining for exposure to nickel ore and Allegheny Ludlum for stainless steel. For LNG tankers I am reviewing the very recent IPO of Gaslog, which has eight LNG tankers under sail, another seven ordered for delivery in 2014-2016, and 11 more managed and operated with BG Group. Gaslog also posts a 2% dividend yield to boot.
