CRASH! Why the Western Areas Ltd share price dropped 17% today

Western Areas Ltd (ASX:WSA) shares have been crushed today after a sharp drop in nickel prices. Here's what caused the rout…

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The worst performer on the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) this morning has been leading nickel producer Western Areas Ltd (ASX: WSA) with a 17% drop to $2.73.

Its share price came under heavy selling pressure at the open after Reuters reported that Indonesia has eased its export ban on nickel ore.

In 2014 the Indonesian government placed a ban on unprocessed ore exports to encourage higher value smelting industries.

But with Southeast Asia's largest economy facing a substantial budget deficit, there is speculation that the government has resumed shipments in order to help stop the gap.

Unfortunately for nickel producers like Western Areas, the expected increase in supply led to nickel prices tumbling 5% to a four-month low of US$9,660 a tonne at one stage.

This is yet another win for short sellers. As well as profiting greatly from the sharp drop in the Bellamy's Australia Ltd (ASX: BAL) share price this week, short sellers will be celebrating Western Areas' decline today.

As I mentioned at the beginning of the week, approximately 12.7% of Western Areas shares were in the hands of short sellers.

Unfortunately for shareholders I wouldn't expect to see a rebound eventuate any time soon. Nickel prices have been tipped to improve in 2017, but with Indonesian supply coming back onto the market this seems unlikely to be the case now.

For this reason I would resist the temptation of picking up its shares on the cheap following today's drop as they could yet fall lower still. Instead I believe investors would be better served elsewhere in the market.

Motley Fool contributor James Mickleboro has no position in any stocks mentioned. The Motley Fool Australia owns shares of Bellamy's Australia. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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