The London Metal Exchange suspended trading in its nickel market after an unprecedented price spike left brokers struggling to pay margin calls against unprofitable short positions, in a massive squeeze that has embroiled the largest nickel producer as well as a major Chinese bank.
Nickel, used in stainless steel and electric-vehicle batteries, surged as much as 250 per cent in two days to trade briefly above US$100,000 a ton early Tuesday. The frenzied move -- the largest-ever on the LME -- came as investors and industrial users who had sold the metal scrambled to buy the contracts back after prices initially rallied on concerns about supplies from Russia.
A Chinese tycoon who built a massive short position in the nickel market is facing billions of dollars in mark-to-market losses as a result of the surge in prices, according to people familiar with the matter.
The debacle will raise memories of the LME’s darkest period, the “Tin Crisis” of 1985, which saw the exchange suspend trading in the metal for four years and pushed many brokers out of business. That was driven by the collapse of the International Tin Council, a body backed by 22 governments that fell apart when it could no longer keep propping up prices.
“This is second only to the tin crisis,” said Malcolm Freeman, a broker at Kingdom Futures who began his career on the LME in 1974. Suspending trading “was the right thing to do, and my gut feeling is that they’ll probably look at canceling today’s trades too.”
Traders, miners and processors often take short positions on the exchange as a hedge for their physical stocks of metal. In theory, any price moves in the physical stocks and the exchange position should cancel each other out. But when prices rise sharply, anyone holding a short position on the exchange needs to find ever-greater sums of collateral to pay margin calls.
Traders and brokers must deposit cash and securities, known as margin, on a regular basis to cover potential losses on their positions. If the market moves against those positions, they receive a “margin call” requesting further funds -- and if they fail to pay, they can be forced to close their position.
Chinese entrepreneur Xiang Guangda -- known as “Big Shot” -- has for months held a large short position on the LME through his company Tsingshan Holding Group Co., which is the world’s largest nickel and stainless steel producer, according to people familiar with the matter. In recent days, Tsingshan has been under growing pressure from its brokers to meet margin calls on that position -- a market dynamic which has helped to drive prices ever higher, the people said.
A unit of China Construction Bank Corp., which is one of Tsingshan’s brokers, was given additional time by the LME to pay hundreds of millions of dollars of margin calls it missed Monday. The necessary payment has now been made, a person familiar with the matter said Tuesday, requesting anonymity because the details aren’t public.
CCB International Holdings didn’t immediately respond to requests for comment, while Tsingshan representatives had no immediate comment on Tuesday.
Nickel had pared some gains to trade 66 per cent higher at US$80,000 a ton before the suspension. Other metals on the LME declined after the announcement.
The LME said it was considering “a possible multi-day closure, given the geopolitical situation which underlies recent price moves.”
The suspension is for at least the remainder of Tuesday. The LME said it would calculate margin calls “for the present time” on the basis of Monday’s closing price of around US$48,000. It said it was considering whether to adjust or cancel trades that were made between Monday’s close and the suspension, when prices shot as high as US$101,365 a ton.
A full default could have calamitous knock-on effects for the exchange, its members, and industrial users around the world who rely on its benchmark prices. The last time the bourse’s clearinghouse declared a default was in 2011, when ring-dealing member MF Global collapsed.
RULE CHANGES
The LME initially announced rule changes late Monday in respond to a daily spike of as much of 90 per cent, allowing traders to defer delivery obligations on all its main contracts, including nickel -- in an unusual shift for a 145-year-old institution that touts itself as the “market of last resort” for metals.
However, the move failed to address the key driver behind the squeeze -- that market participants with short positions were being forced to close them out because they couldn’t meet margin calls.
Nickel was already rallying on tight supplies even before Russia’s invasion of Ukraine, which has sharpened fears of sweeping commodity shortages. Higher nickel prices, if sustained, threaten to ratchet up costs for electric-vehicle batteries and complicate the energy transition. Russia produces 17 per cent of the world’s top-grade nickel.
A spokesperson for Trafigura, one of the top physical traders of the metal, said it supported the LME’s decision.
Nickel prices were quoted at US$80,000 a ton as trading was suspended. Other metals pared or erased gains after the announcement. Aluminum dropped as much as 6.9 per cent to US$3,483 a ton, the biggest decline since 2018.
Five Things to Know About Nickel’s 90%
Price Surge
By David Fickling | Bloomberg
Today
It’s not often that any markets see a contract nearly double in value in the space of a day — but that’s what happened with nickel traded on the London Metal Exchange Monday, with a 90% jump that went as high as $55,000 a metric ton before closing at $48,078. Things went even wilder on Tuesday, rising as high as $100,000 — nearly quadruple the price last Friday.
That sounds dramatic, but it’s unlikely that you’d notice the ripple effects of this in the wider economy over the year ahead, and prices driven by a short squeeze of this sort tend to calm down rapidly. The rising cost of nickel won’t hit your hip pocket the way that the price of oil or wheat may well do. Here’s why:
You don’t use a lot of nickel.
The U.S. five-cent coin, despite its nickname, is mainly made of copper — nickel only comprises about a quarter of the alloy. About three-quarters of the world’s nickel is mixed with chromium to make stainless steel, which in turn is mainly used in appliances, machinery and cutlery. Unlike crude oil, natural gas, wheat, rice and soybeans, such metals aren’t consumed day in, day out — they’re only used when people make one-time purchases of discretionary goods.
When the price of food or energy rises, it has a lasting effect on the cost of living — and because we buy those products every day, we notice the difference. Politicians are seen as out of touch if they don’t know the price of a bottle of milk. No one expects you to know the cost of a cutlery set from one month to the next, and only at the very lowest end would the price of nickel make a significant difference to that number.
There are two types of nickel out there.
Nickel traded on the London Metal Exchange is so-called Class 1 nickel, which must be at least 99.8% pure. But about half of the world’s nickel is less refined Class 2 metal, most of it in the form of products such as ferronickel and nickel pig iron which can be cheaply converted into stainless steel at Chinese smelters.
Those two products in turn tend to be produced by quite different ores. Nickel sulfide deposits are ideal for processing into high-purity products like Class 1 nickel, but they’re relatively scarce and confined to a handful of locations in temperate countries. The boom market in recent years has been in Class 2 nickel, which is mostly produced from nickel laterite, a lower-grade ore that’s easily strip-mined from weathered ground in Southeast Asia and other parts of the tropics.
Russia accounts for only about 9% of nickel supply, but it has closer to a third of the world’s nickel sulfide ore. That gives the status of its exports an outsize impact on the price of the Class 1 metal traded on the LME. This grade is also currently most suitable for producing nickel sulfate, a chemical that will have growing importance in the coming years because of its use in electric vehicle batteries.
Nickel is the most volatile metal.
Many metals are produced by relatively standardized methods. Almost all the world’s aluminum has been made via the Hall-Heroult smelting process since the 19th century. That makes prices relatively predictable, because there’s only one technology to think about. Nickel is different, with an array of different methods and end-use sectors that interact in often unpredictable ways. Lurching swings in price are fundamental to the nickel market, with 90-day volatility over the past 10 years markedly higher than for other LME-traded metals:
The potential for processing lower-grade Class 2 nickel into higher-grade Class 1 product, however, should ensure that prices move back into line over time. Once LME prices are north of $25,000 a metric ton, there’s good money in upgrading Class 2 metal to the higher-quality product. We saw something similar during nickel’s last dramatic spike, when it nearly quintupled in price in the two years to April 2007 before losing three-quarters of its value in the two years afterwards, as the rise of lower-grade ferronickel and nickel pig iron technologies stole away market share.
Inventories are low, but not desperately so.
The bulk of the world’s metal trading takes place away from exchanges like the LME in direct contract relationships between a relatively small number of producers and consumers. The metal that finds its way to the exchanges is usually surplus product, which the same producers and consumers buy and sell to hedge the prices they’re receiving in the physical market, and come up with a reference price against which they can benchmark those trades.
Traders pay close attention to the inventories of metal held in exchange warehouses because they’re seen as the evidence of how tight the wider market really is. Those stocks — especially of the on-warrant metal that’s available for traders to pick up — have been falling to historically low levels. Still, with 36,654 of deliverable metal in the LME’s warehouses, we’re far above where we were in 2006, when the 870 tons of global inventory could have been stacked on one side of a tennis court without rising above the level of the net.
There’s a nickel supply boom underway.
Another of the processing revolutions that periodically rock the nickel market is underway right now, as a swath of Chinese plants start up in eastern Indonesia to turn low-grade laterite ores into a product with just the right grades of nickel and cobalt for electric vehicle batteries. That technology hasn’t worked well in the past, but the scale of investment going on suggests that companies like Zhejiang Huayou Cobalt Co. think they’ve cracked the code for turning a profit from this business. Unlike scarce nickel sulfide deposits, laterites are abundant across the world — so if that bet is right, we may have unlocked a significant new source of supply as we did with the nickel pig iron revolution a decade ago.
Commodity analysts see nickel trading below $20,000 a ton after the first quarter of this year and not creeping back above those levels until at least 2025. Those forecasts often turn out to be wrong, but it’s unlikely that prices will remain close to current levels for more than a few weeks. Nickel is not a scarce commodity, and we’re making more of it than we ever did before.
David Fickling is a Bloomberg Opinion columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.
