LONDON. The war in Ukraine destroyed the nickel market. The risks have accumulated over the years.
Banks and brokers were lending heavily to manufacturers and speculators seeking to take a stand in the humble metal, a key component of stainless steel and electric vehicle batteries.
The London Stock Exchange, where metals have been traded for 145 years, did not notice the growing danger.
“The simple fact is that we had no idea about the size of the risk,” said Matthew Chamberlain, chief executive of the London Metal Exchange.
The LME’s response to the crisis threatens its dominance in the global metals market. It ground to a halt when nickel trading spiraled out of control on March 7, then halted the market and wiped out $3.9 billion worth of transactions the next morning, infuriating traders who were betting on rising nickel prices.
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The shutdown left nickel companies without a rudder for more than a week before limited and chaotic trading activity resumed on Wednesday. The market has been buggy, with prices falling to the newly established LME daily limits. Some trades have gone below these levels, including early Friday, causing more transactions to be canceled on the LME.
“This behavior in the market reduces its attractiveness as a free market and a global pricing mechanism,” said Michael Farmer, a hedge fund manager known as Mr Copper.
The nickel explosion affected the markets. Tsingshan Holding Group, the Chinese nickel producer at the center of the crisis, owed banks and brokers $4.5 billion in margin payments related to its trading after the LME canceled March 8 nickel deals, people familiar with the talks said. between creditors. . The amount of impact on banks was not previously reported.
A worker separates nickel ore from other elements in a processing plant.
Photo: Yusuf Ahmad/REUTERS
Banks led by JPMorgan Chase & Co., including Standard Chartered PLC, BNP Paribas SA and several Chinese banks, are in talks to refinance trade to prevent further damage. Representatives from JPMorgan, Standard Chartered and BNP Paribas declined to comment.
As an illustration of how out of control the market has become, had the London Metal Exchange not canceled hours of trading and allowed prices to remain above $100,000 per metric ton, Qingshan would have owed the group approximately $15 billion, man. familiar with the auction said.
When Russia, one of the world’s largest nickel suppliers, invaded Ukraine, prices for the metal rose on fears of supply disruptions. This resulted in the loss of Tsingshan’s position in the nickel market worth billions of dollars. Some of the Chinese manufacturers’ brokers on the LME were furiously trying to get out of positions by buying nickel, creating pressure.
Only 20% of Tsingshan’s nickel supply was fully visible on the LME, according to a person familiar with the trade. According to people familiar with the deals, the rest of the trading took place in private transactions known as OTC agreements with banks.
Critics of the LME say they should have foreseen the impending explosion anyway. Tsingshan began taking a large short position last year and the nature of the trade, if not the size, was known to the market. The public position data showed a strong concentration of individual player positions in both the forward market and the underlying physical nickel market.
LME “slept at the wheel,” said Andrew Mitchell, director of nickel research at consulting firm Wood Mackenzie. “It got to the point where things were happening that weren’t normal market forces.”
Traders in the hall of the London Metal Exchange in London.
Photo: Simon Dawson/REUTERS
Other factors exacerbated the crisis. The London market lacked the guards of many other exchanges, such as circuit breakers or limits on daily price fluctuations. The CME Group Comex exchange, which trades copper and gold, stops trading if prices change by 10% within an hour.
The exchange has also been slow to act and allowed trading to continue on March 7 despite a 66% rise in nickel prices, a sign that the market has turned erratic.
The LME traces back to the sawdust circles around which traders bought and sold metals in the early 1800s as the Industrial Revolution was gaining momentum. An integral part of the exchange, where dealers exchange metals with the help of shouts and gestures, remains an open screaming ring formed by a tight circle of red couches.
As the demand for metals grew in this century along with the growth of the Chinese economy, the stock exchange gained new importance and a bidding war broke out over it. Hong Kong Exchanges and Clearing Ltd. ahead of CME, Intercontinental Exchange Inc. and a division of the New York Stock Exchange, buying the LME in 2012 for £1.4 billion, then equivalent to $2.2 billion. He paid a huge premium to the value of LME shares.
Mr. Chamberlain advised the Hong Kong Stock Exchange on the deal as a banker for UBS Group AG before moving to the LME. He curbed the LME’s rampant culture by banning alcohol on the job in an open protest ring. He tried to ban strip clubs during the annual LME conference.
One area he didn’t change was getting brokers to agree to clearer reporting of OTC transactions. According to the LME documents, brokerage companies that are members of the exchange refused the offer to disclose information. They complained about the complexity and cost of such reports.
Matthew Chamberlain, Chief Executive of the London Metal Exchange.
Photo: Anthony Kwan/Bloomberg News
In the meantime, Qingshan was ramping up a huge nickel trade that would benefit if prices fell. With smelters in China and Indonesia, Tsingshan could flood the market with supply.
In total, the firm sold about 190,000 metric tons of nickel on the exchange and through private deals with banks and brokers, traders and analysts calculated. At closing prices on March 7, it was worth $9.1 billion. Most of these positions were entered into on a bilateral basis with various banks rather than forward contracts on the LME.
Traders are divided over whether Tsingshan is simply hedging the huge amount of nickel it produces, or whether it is making a big and risky bet on price direction.
Tsingshan representatives could not be contacted for comment.
Mr. Chamberlain said that after the nickel fiasco, the LME will impose stricter requirements. “I think now the LME will need to step in and say it has to happen,” he said.
The exchange has already tightened its requirements for the exchange of information in nickel, and also for the first time established restrictions on daily movements. The preliminary deal that banks struck with Tsingshan this week has given the exchange confidence that it will be able to reopen the market.
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Nickel traded on Wednesday, Thursday and Friday, falling by the maximum amount allowed by the new caps, which took some pressure off Tsingshan’s trading.
This saga could open the door to CME competitors and the Shanghai Futures Exchange. CME is reviewing what led to the explosion in the London market with a view to a potential nickel deal, a person familiar with the matter said, adding that any launch is still a long way off. CME declined to comment.
“We are very aware that the events of the past week have damaged our reputation,” said Chamberlain, who is set to leave the LME this year to join a cryptocurrency company. “We recognize that we have a lot of work to do to ensure that we remain this place of choice.”
— Jing Yang and Rebecca Feng contributed to this article.
Email Joe Wallace at [email protected]
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