Friday, May 23, 2014

Another government caused profit opporutunity

I have talked in the past that speculation is the art of profiting from government caused intervention and/or interference in the markets. Another example is the artificial increase in nickel prices this year that was caused by the Indonesian governments decision to not allow miners in the country to export unrefined nickel ore.


 Indonesia, among the world's biggest suppliers of natural resources, halted all mineral ore exports on Sunday to try to promote domestic processing, but threatening the country's nickel and bauxite industries worth more than $2 billion in annual shipments.


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The long-planned ban hopes to eventually boost Indonesia's profits from its mineral wealth by forcing miners to process their ores before export. But officials fear a short-term cut in foreign revenue could widen the current account deficit, which has undermined investor confidence and battered the currency.


The reason for the ban is to boost the value add to Indonesia's nickel exports so that more jobs and more economic activity occurs in Indonesia. It is obvious that it is not economical to refine or value add to the nickel ore being mined in Indonesia or the metal miners would in fact do that in order to capture more margin. Instead of creating an environment where companies voluntarily choose to build refinerys the government of Indonesia, like all governments unfortunately, thinks it can legislate economic activity. The net result is less nickel on the world market and higher prices. As Indonesia is not the only place in the world that mines nickel the other producers will capture the windfall of higher nickel prices. At least until the fools running Indonesia realize that their policy failed and relax the export ban.


One way to speculate on this, at least until they relax the ban, is to buy a nickel producer. I think a position in Sherritt International would fit the bill. The company is a near pure play, after recently divesting its coal mining assets, in nickel mining and refining. The company is currently ramping up production of a new nickel mine that it recently opened in Madagascar. I think this could make a decent trade over the short to medium term. If one were to enter this trade it would be incumbent upon one to keep an eye on what the Indonesian government was saying and doing. I would exit the trade if any noise about lifting the nickel export ban was brought up.

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