In BHP’s recent December half, for instance, the average price it received for a ton of its nickel was $US19,651. In the June half of last year it was $US17,537 and in the previous December half $US15,140.
At the start of this month nickel was trading around $US25,000 a tonne and then, in the space of two days, soared above $US100,000 a tonne.
The sanctions on Russia and Russia’s role in the nickel market – it produces about 12 per cent of the world’s nickel and more than 20 per cent of the pure nickel now in increasing demand – exacerbated a pre-existing vulnerability in the LME market.
Vladimir Putin’s threat to stop exports of some commodities and raw materials this week (energy, agricultural commodities and strategic metals like nickel and palladium would presumably be among them) was a foreseeable response to the intensifying sanctions that are wreaking havoc within Russia.
By themselves they would have added to the upward pressure on metals prices that the invasion has generated.
Within the market, however, there was already a recipe for a dramatic collision between buyers and sellers of nickel contracts.
For months one of the world’s major nickel and stainless-steel producers, Chinese entrepreneur Xiang Guangda, had been building a massive short position in nickel on the LME via his Tsingshan Holding Group.
There was nothing necessarily untoward or reckless about his shorting of nickel. Producers often hedge their physical production, or some of it, to lock in their prices, although Xiang was taking up short positions in “class 1” or pure nickel whereas most of his own production is in lesser grades, complicating any physical delivery on the LME contracts.
On the other side of the market an as-yet unknown trader was taking a big long position and controlled, it is speculated, at least half the inventories of nickel held in LME-approved warehouses. (LME contracts can be settled in cash or via physical delivery).
In effect, the trader, whether by design or good fortune, was in a position to “squeeze” Xiang’s short position when the price started to surge.
When metals prices move rapidly on commodities exchanges those on the wrong side of the market are hit by margin calls to cover the potential losses on their contracts even as they scramble to cover or close out their positions. Failure to meet the calls results in forced closure of their positions.
On Monday, one of Xiang’s brokers – apart from China Construction Bank – failed to meet several hundred million dollars of calls but was, unusually, given extra time by the LME to make good, which it did.
On some estimates Xiang could have been facing paper losses of as much as $US8 billion ($11 billion) on his 100,000 tonne short position when the price jumped above $US100,000 a tonne – it’s almost certainly billions of dollars even at the lower prices that are expected when trading resumes – although the losses on the contracts would be offset to some extent by the increased value of his physical production, depending on the prices at which it has been contracted and the volumes contracted.
By suspending trading and canceling Tuesday’s trades the LME has given everyone in the market, including Xiang and his brokers, time to organize their funding and trading strategies so that trade can re-open sometime next week, hopefully (for the LME and its brokers) in an orderly fashion.
The LME is regarded as the “market of last resort” for metals that are usually directly contracted between producer and customer and the short squeeze has provided an extremely exaggerated depiction of the underlying relationship between the actual supply and demand for nickel.
The market is, however, tight. The sanctions on Russia will make it tighter and any withdrawal by Russia of its nickel from the market (or its diversion to, for instance, China) would make the market even tighter again.
The cost of electric vehicles, stainless steel and the batteries for everything from laptops to, among other things, cordless power tools, would rise while the profits of the big nickel producers like Vale, Glencore and BHP (Russia’s Norilsk is the world’s second-largest producer) would also be boosted significantly.
Nickel probably won’t be the only commodity nor the LME the only market where traders and producers get caught out as the flow-on effects of Russia’s invasion and the West’s response continue to emerge and percolate.
Putin’s actions and the reactions have sent the black swans flying in all directions.
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