Published: 10.03.2022 – 18:33
Chinese entrepreneur Xiang Guanda lost billions of dollars in the stock market betting on falling nickel prices. Unfortunately for him, the war pushed the price of that commodity to record levels, and his losses led to an extremely rare event in the stock market.
The war in Ukraine led to the fact that on Tuesday, March 8, the Chinese nickel baron lost record amounts. Entrepreneur Xiang Guanda, dubbed the “Big Shot” in financial circles, paid a very high price—at least $2 billion—for risky bets on a drop in the price of nickel, while the invasion of Ukraine led to a historic spike in the price of the commodity.
The 60-year-old at the head of Tsingshan Holding, the world’s number one stainless steel producer, is one of the biggest buyers of nickel, the main component of the metal it produces.
A miscalculation for a Chinese billionaire
Xiang Guanda started betting early in 2021 and is always stronger on falling nickel prices. An amazing choice: this raw material plays a central role in the production of batteries used in some of the most promising industries, such as electric vehicles. Thus, the demand for nickel, supported by fans of Tesla and other “green” cars, is not going to fall.
That’s why most traders have been betting on rising nickel prices in recent months. But not Xiang Guanda. “He probably felt that the price set by the market already includes all the growth potential of sectors such as electric vehicles, and therefore there is no reason for further growth in the price of nickel,” said Alexandre Barades, an analyst at IG France. , contacted France 24.
Another, more technical reason is what is known as “risk hedging”. Tsingshan Holding does pre-order large amounts of nickel for its steel production. If the price of this raw material were to fall, the group would pay far more for the nickel than it was worth when it was delivered to them. In parallel, betting on a fall, Xiang Guanda considered himself smarter than the market and “hedged” the possibility of falling prices.
Russia’s decision to invade Ukraine has not changed its thinking or strategy. However, Russia is the country that matters on the nickel map. “Western sanctions have hit the world’s No. 1 nickel producer, Russia’s Norilsk, with all their might,” recalls the daily newspaper Le Monde.
Consequence: Nickel is likely to become increasingly rare in the markets. And who says rarity, says the rise in prices. Specifically, “buyers are increasingly eager to get their hands on the precious raw material, but those who have it, anticipating that the price will rise, refuse to sell, pushing buyers to offer ever higher prices in the hope of convincing sellers,” Alexander explains. Barades.
This is how the spike in nickel prices put Xiang Guangdu in an extremely uncomfortable position in the stock market. The London Metal Exchange (LME) – the main exchange for this raw material – seeing that the Chinese billionaire’s questionable rates will cost him more and more, asked his brokers from Tsingshan Holding to invest more funds to cover any losses.
“It’s like the price of oil went from $100 to $400 in a week”
No wonder that. This is the traditional procedure in such situations. But one of Xiang Guanda’s brokers, the China Construction Bank (the second largest commercial bank in China), refused on Monday, March 7, to return to the bank. And not a little, since the LME demanded several hundred million dollars from him.
It was this refusal, or failure to meet the LME’s demands, that triggered one of the biggest price spikes in the history of commodity markets. The price of nickel quadrupled in three days to hit $100,000 a tonne on Wednesday, March 9th. Previously, its price rose in a year from $15,000 per ton to $25,000 per ton in early March 2022. And this was already considered a significant increase …
“These are extremely rare events in the stock market. It’s a bit like the price of oil falling from $100 to $400 in less than a week,” emphasizes Alexander Barades. Faced with this steep rise, LME decided to stop all transactions on nickel until further notice.
Nickel fell victim to a particularly explosive mixture of ingredients: a strong external shock (the invasion of Ukraine), a major market player tripping over their own stakes in the stock market, and “the arrival of speculators who sought to take advantage of the situation and thus this phenomenon intensified,” sums up analyst at IG France.
Song “Black Swan”
This event is called the “black swan” in the financial markets. These are unpredictable incidents that cause prices to fluctuate much more than usual in a short period of time. “Given the importance of fluctuations in the nickel market, this is a black swan among black swans,” surprised on Mark Thomson’s twitter, commodity market specialist. According to the “black swan” theory written after the 2008 financial crisis to assess the likelihood of such events occurring, an incredible spike in nickel prices is as likely as “winning the lottery 1.2 million euros with the same ticket more”. more than twenty times in a row,” writes the website of the Moneycontrol exchange.
#nickelToday’s move was about 30 standard deviations. One of the most unlikely events in the history of the financial market. Black swan of black swans!
— Mark Thompson (@METhompson72) March 7, 2022
If this event is unique in its scale, then it is in line with the spirit of the time, Alexander Barades believes. “This is symptomatic of Russian risk to financial markets. It is thanks to such an incident that we are aware of the discrepancy between the real weight of the Russian economy, whose GDP barely exceeds that of Spain, and the impact that the slightest shock in Russia can have on the commodity market, ”the analyst emphasizes.
For him, Xiang Guanda will certainly not be the only victim of financial market volatility. Whether it’s wheat, titanium, aluminum or even sunflower, Russia and Ukraine are “lofts” for raw materials. Between the destruction of infrastructure due to the war and the economic sanctions imposed by the international community on Russia, the price waltz is not over.
And this is not only a problem for wealthy traders. “If prices do not fall sharply, this will affect the cost of companies. [obligées de payer plus cher les matières premières]. Conclusion: the impact will be transferred to the price charged to consumers,” sums up Alexander Barades. It’s not just Tesla enthusiasts who are interested, as nickel is used to make batteries used in electric ovens or in some laptops. Do not forget that Electric guitar strings also contain it. Maybe this is the final riff.
