Early last month on the London Metals Exchange, a Chinese metals producer named Tsingshan Holding Group “wagered a massive bet that the price of nickel would fall,” reports CNN Business. At the peak Tsingshan’s position “was equivalent to about an eighth of all of the outstanding contracts in the market.”
But between Friday, March 4 and Tuesday March 8, the metal soared in value from about $29,000 to $100,000 per ton. “If prices had stood at $100,000 the company would have owed the London Metals Exchange $15 billion, according to the Wall Street Journal.”
The spike generated margin calls higher than the London Metals Exchange [the LME] had ever seen — and if paid, they would force multiple defaults that would ripple through the exchange and destabilize the global market. Exchange executives scrambled to respond, ultimately throwing a lifeline to the brokers representing Tsingshan and other producers. In an unprecedented move, they halted trading and retroactively canceled all 9,000 trades that occurred on Tuesday, worth about $4 billion in total. The market would remain dark for a week, unleashing a tidal wave of chaos and a mob of angry investors onto the exchange. In its wake, threats of lawsuits abound and trust has eroded. [The day it re-opened, CNN also reported the exchange “had to suspend the electronic trading of nickel shortly after it resumed due to a technical problem.”]
Now, the 145 year-old British giant is teetering on a nickel. Over the past century-and-a-half the LME, known for its ring of red couches and barking brokers, has successfully trudged its way through world wars, meltdowns and defaults. But nickel, the metal used in stainless steel and the lithium-ion battery cells in most electric vehicles, might be what finally brings the world’s largest market for base metals contracts to its knees.”The world’s pricing mechanism for nickel is failing,” said Daniel Ghali, the director of commodities strategy at TD Securities. “The question is, will it continue to fail?” Others weren’t as diplomatic. “The LME is now very likely going to die a slow self-inflicted death through the loss of confidence in it and its products,” tweeted Mark Thompson, executive vice-chairman at Tungsten West, a mining development company….
Until 2012, the LME was owned by its members, the same people who traded on the exchange — but then it was sold to Hong Kong Exchanges and Clearing (HKEX) for $2.2 billion….
The LME’s lack of transparency allows two or three big names to throw around vast sums of money and “hijack” a relatively illiquid market, said Adrian Gardner, principal analyst of nickel markets at Wood Mackenzie…. Sitting on the other side of the short were hedge funds, who had bet that nickel supply would decrease because of Russia’s invasion of Ukraine (Russia provides about 20% of all top-grade nickel). When the LME decided to retroactively cancel those $4 billion in gains on March 8, it was hedge funds who lost giant sums of money. Global investment management firm AQR, which has $124 billion in assets under management, was among those that lost money when trades were canceled. “The winners were commodity producers and their banks, and the losers are the various clients that AQR and other large asset managers represent: firefighters, municipal workers, and university endowments,” said Jordan Brooks, principal at AQR Capital Management. AQR is considering legal action against the exchange. Investors, said Brooks, “acted in good faith and provided liquidity, but the LME just decided to shift their trading gains to commodities producers and their banks….”
Volume in trading has yet to recover, raising questions about the LME’s ability to accurately benchmark the price of the metal. Fewer than 210 contracts were traded in the first hour after the market opened on Tuesday. That’s down about 60% from the 90-day average before the trading halt. Other metals on the LME, like copper and aluminum, have also seen a decrease in trade volume….
The Chicago Mercantile Exchange doesn’t currently trade nickel, but perhaps it soon will. “[The LME] did something that was egregious and a betrayal of trust,” said Brooks. “I’d be shocked if the strategic plans of other exchanges haven’t changed in the past three weeks.”
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