JJN: Nickel Is A Critical Metal In Coming Energy Transition (NYSEARCA:JJN)

The iPath DJ-UBS Nickel Total Return Sub-Index ETN (NYSEARCA:JJN) is an exchange traded note offered by Barclays Bank PLC. It provides exposure to nickel metal by tracking the Bloomberg Nickel Subindex Total Return Index. Importantly, the ETN does not appear to suffer from ‘futures-roll’ decay that typically afflicts futures-based funds. I am bullish on JJN and nickel prices as I see demand for nickel growing significantly in the coming years.

Fund Overview

The iPath Series B Bloomberg Nickel Subindex Total Return ETN is an exchange traded note (“ETN”) offered by Barclays Bank PLC (note, on Seeking Alpha, the ETN is referred to “iPath DJ-UBS Nickel Total Return Sub-Index ETN”, but UBS Securities entered into a commodity index licensing agreement with Bloomberg in 2014, and the ETN was renamed.)

It offers investors exposure to the Bloomberg Nickel Subindex Total Return Index (“Index”). The index reflects the returns of owning an unlevered position in the futures contracts on nickel. The ETN currently has $54 million in assets and charges a 0.45% annualized fee.

The Case For Nickel As An Energy Transition Metal

An investment case can be made that nickel is one of the most important metals in the upcoming clean energy transition away from fossil fuels. In an IEA report titled The Role of Critical Minerals in Clean Energy Transitions, nickel is cited as moderately to highly important in many clean energy technologies (Figure 1).

Nickel’s Role In Batteries

Perhaps the biggest role of nickel is the use of the metal within the cathode of batteries. Nickel is used in many battery chemistries and the offers some of the highest energy densities on the market currently (Figure 2).

In fact, battery-use is expected to be the primary demand driver for nickel metal in the next few years (Figure 3).

However, nickel production is highly concentrated, with Indonesia, Philippines, and Russia accounting for more than 50% of global production (Figure 4).

This has fueled a relentless rise in nickel prices in the past few years, from a low of $8,000 / ton in 2016 to a peak of over $45,000 / ton when war broke out between Russia and Ukraine (Figure 5).

Another key driver that has fueled nickel’s price rise is that not all nickel metal is created equal. The nickel produced from Indonesia and Philippines are mostly nickel pig iron, a low-grade ferronickel that is only suitable for the production of stainless steel. Nickel for battery applications typically need to be higher purity, so high purity nickel commands a premium relative to the spot price.

In recent years, China’s Tsingshan Holdings Group (the world’s largest nickel producer) claims to have invented a process to convert nickel pig iron into nickel matte, an intermediate product that can be further refined into nickel suitable for batteries. However, the process remains unproven and there are few reports on actual deliveries of nickel matte or batteries made from nickel matte.

ETNs Do Not Hold Physical Commodities

While the future looks bright for nickel in terms of energy transition demand, investors should keep in mind the JJN ETN does not actually hold physical metal. It doesn’t even hold futures on nickel. Instead, it provides synthetic exposure to the investment “returns that are potentially available through an unleveraged investment in the futures contracts on nickel”.

One complaint I have regarding the JJN ETN is that on its website, investors cannot even find information on which futures maturity the ETN is synthetically holding / replicating. Without more information on the ETN’s holdings, it is difficult to assess whether the JJN ETF suffers from a ‘futures roll’ decay that afflicts other futures-based ETFs and funds.

Futures-Based Products Are Not Buy-And-Holds

For example, as I noted in a recent article on the ProShares Ultra Bloomberg Natural Gas ETF (BOIL), commodity futures are typically in contango, where longer-dated futures are higher in price. So a futures-based ETF like the BOIL loses value when it ‘rolls’ its expiring ‘cheap’ futures contracts to ‘expensive’ futures with a longer expiry (Figure 6). This makes futures-based ETFs terrible long-term investments as it decays on every futures roll.

Returns

The JJN ETN has performed very well in the past few years. It has returned 46.0% and 28.3% respectively on a 1Yr and 3Yr timeframe to December 31, 2022 (Figure 7).

This compares well to the 1Yr and 3Yr average annual price returns in spot nickel prices of 43.1% and 29.7% respectively (Figure 8).

Judging by the historical returns of the JJN ETN compared to the price change in spot nickel prices, it appears the fund does not suffer from any ‘futures roll’ decay.

Risk

The bull case for nickel is well understood, as it is a critical element in the upcoming clean energy transition. However, nickel, as an industrial metal, is still affected by cyclical supply/demand factors. In 2022, nickel prices actually plunged after the Russia-induced surge because China was in periodic lockdowns, impacting demand for industrial metals like nickel.

In the past few weeks, we have seen industrial metals like nickel and copper stage strong rallies, on the back of Chinese stimulus hopes. I covered this topic in more detail in a recent article on the Global X Copper Miners ETF (COPX).

The risk to industrial metals is that if China does not deliver on stimulus expectations, or if the rest of the world falls into a deep recession, then industrial metal prices could suffer cyclical declines.

Conclusion

The JJN ETN is the only investment product I could find that provides exposure to nickel, a critical metal in the clean energy transition. The ETN tracks the Bloomberg Nickel Subindex Total Return Index and does not appear to suffer from ‘futures-roll’ decay that typically afflicts futures-based products. I am bullish on JJN and nickel prices as I see demand for nickel growing significantly in the coming years due to the clean energy transition.