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Nickel Prices Finally Fall Following Historic Short Squeeze

  • Just three weeks ago, a historic nickel short squeeze nearly broke the London Metal Exchange. 
  • Nickel prices have since returned to Earth, reaching parity with prices on the Shanghai Futures Exchange. 
  • Now, the London Metal Exchange is tasked with the uphill battle of regaining investors’ trust.

Three weeks ago,  a historic nickel short squeeze sent nickel prices soaring to an astonishing $100,000 per tonne--doubling the previous all-time high over the course of one morning--and plunged the London Metal Exchange into an existential crisis. The LME subsequently closed trading and took the dramatic step of retroactively scrapping $3.9bn worth of trades made prior to the suspension--outlining the nickel market had become disorderly with prices no longer reflecting the underlying physical market.

Luckily, some semblance of normalcy has now returned to the nickel market.

Nickel volumes surged on Tuesday as prices traded within the LME’s daily limits for the first time since reopening last week, an encouraging sign that the market is starting to stabilize, though the restart of nickel trading since Wednesday has been hit by a series of electronic glitches.

A flurry of deals came pouring in as LME prices moved back into line with nickel contracts trading on the Shanghai Futures Exchange, which remained open during a weeklong suspension of trading in London in the wake of the fiasco. LME nickel was trading 6% lower at $29,510 per ton on Tuesday, rebounding from a loss of as much as 15%. SHFE prices rose 1.6% to 210,040 yuan a ton, which is equivalent to ~$29,200 a ton once currency conversions and VAT deductions are taken into account.

Nickel trading reopened on March 16 but remained frozen as the exchange’s daily limits prevented futures from falling to a level where buyers were willing to step in. Bullish investors looking to unwind their positions had been caught in a long queue of sellers over the past few days as prices lurched lower in daily limit-down moves. 

Not surprisingly, corporate greed and malfeasance have again been blamed for the latest trade saga. 

Source: Bloomberg

Banks To Blame

Nickel, which has a distinct silvery shine, is mostly alloyed with other metals to make goods that are used throughout the global economy. About 72% of the world’s nickel supply is used to make stainless steel, including rechargeables and those that go into electric vehicles.

Russia is one of the world’s largest producers of nickel. When the country invaded Ukraine, fear of supply disruptions sent the price of nickel into a frenzy, so much so that on March 8, the London Metal Exchange decided to suspend nickel trading. Never mind the fact that Russian metals have not been sanctioned.

Related: Are You Really Being ‘Gouged’ At The Gas Pump?

Some traders were willing to bet the farm that the wild nickel rally would come crumbling down like a house of cards and opened massive short positions--but got their timing wrong and were forced to cover.

Just like the famous copper squeeze of more than a century ago, the nickel market snafu has been largely linked to enormous short positions held by a single man: Chinese metal trader Xiang Guangda, the founder of China-based Tsingshan Holding, the world’s biggest nickel producer.

According to Bloomberg, Xiang Guangda, aka the “Big Shot” for his towering position in the metal industry, held an enormous short position of over 150,000 tons of nickel, more than 5x the 30,000 tons held directly by LME. The remainder was held via bilateral, “over-the-counter” deals with banks led by JPMorgan Chase & Co, and including BNP Paribas SA, Standard Chartered Plc and United Overseas Bank Ltd. Guangda had built up the biggest short position in the metal and is now facing a hit of nearly $8bn.

And LME CEO Matthew Chamberlain is now blaming the banks for the historic meltdown.

The embattled LME chief says the banking industry bears some responsibility for the conditions that led to a massive short squeeze and has revealed that the banks lobbied last year against efforts to increase transparency in the metals market.

“The OTC position has caused significant problems for the exchange. The LME made a proposal last year to allow the exchange greater visibility of positions held on the OTC market, but was rebuffed by a number of banks,” Chamberlain has told the South China Morning Post.

The proposal for greater transparency for over-the-counter positions last year came at the same time as the LME was facing an outcry from users over a proposal to close its open-outcry trading floor, “the Ring,” from which it later backed down. The LME, which since 2012 has been owned by Hong Kong Exchange & Clearing Ltd, is the ultimate decision-maker on changes to its rules and consults with market participants, including many big banks. The industrial metals industry relies on LME prices as benchmarks for physical transactions, while financial investors in products like commodity indexes use the exchange’s prices to value their positions. 

Chamberlain has acknowledged that the exchange would have “a huge amount of work” to do to regain the trust of investors but says he’s proud of how the LME’s management and staff have handled the situation.

By Alex Kimani for Oilprice.com

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