Some of the world’s biggest banks have been working over the weekend to resolve the nickel market crisis that has put them on the hook for billions of dollars owed by the Chinese steel giant.
JPMorgan Chase JPM -2.25% & Co., Standard Chartered STAN -0.41% PLC and BNP Paribas SA BNPQY -3.09% were among banks and brokers seeking to reach an agreement with Tsingshan Holding Group, people familiar with discussions. Trades placed by a Chinese steel and nickel producer on the London Metal Exchange contributed to an uncontrolled rise in prices, causing the exchange to halt trading and cancel eight-hour trades last Tuesday.
Nickel, a cog in the global economy due to its use in stainless steel and electric vehicle batteries, has not traded since.
The crisis has spilled over into the financial system, leaving Qingshan’s banks and brokers with unpaid margins of several billion dollars that the brokers demand upfront to make trades, some people familiar with the discussions say.
Negotiations between Tsingshan’s creditors, led by JPMorgan, have focused on expanding the Chinese company’s credit lines so it can pay them the margin it owes, some people familiar with the talks said. One of the plans discussed was to back this loan with Tsingshan’s steel and nickel assets in China and Indonesia, some people said.
Traders on the London Metal Exchange last September. The LME cancellation wiped out $3.9 billion worth of transactions.
Photo: Yui Mok/PA Wiree/Zuma Press
Despite Qingshan’s troubles with nickel prices close to record highs, extending such a loan According to some people, this can be very lucrative given the company’s huge manufacturing capabilities.
Nickel prices began to rise after Russia, a major producer of the metal, invaded Ukraine, a prime example of how war and punitive Western sanctions have turned global commodity markets upside down, pushing metal and energy prices to their highest levels in years. .
Last week, the rally turned into a crisis for the LME. Producers like Tsingshan often sell forward contracts to lock in prices for the physical nickel they mine and refine. In essence, they hold positions that win when prices fall and lose money when prices rise.
Some of Tsingshan’s brokers were desperate to buy back these nickel contracts to stem losses and avoid escalating margin calls. This purchase pushed benchmark three-month forward prices up 66% in a single session.
Wild trading continued early last Tuesday as brokers continued to try to cover the short positions they held on behalf of Tsingshan and other producers. Meanwhile, hedge funds and others have been aggressively buying nickel, propelling the market higher, people familiar with the trade say.
At one point, nickel prices more than doubled to a record high of over $100,000 per metric ton. After receiving calls from several smaller brokers saying they would default at 9 a.m. if prices remained at record levels, the LME suspended the market shortly after 8 a.m. local time, according to a source familiar with the exchange.
Tsingshan Holding Group offices in Shanghai. Trades placed by the Chinese steel and nickel producer contributed to the uncontrolled rise in prices.
Photo: Qilai Shen/Bloomberg News
However, shortly after noon local time, the LME went off as a bombshell: to save brokers from margin calls they could not afford to pay, it canceled trades that were taking place before the suspension, destroying $3.9 billion in transactions.
The decision infuriated financial managers who thought they had profited from the rally.
“Pausing trading and giving participants time to find the funds they need again is perfectly legal,” said Jordan Brooks, co-head of the macro strategy group at AQR Capital Management. “What I think is striking to us, other market participants and the financial industry as a whole, is the decision to destroy transactions made without coercion and done in good faith.”
However, the suspension and cancellation of deals gave the market time and space to repair the damage and prevent a wider repercussion.
Rewinding time in trading on Tuesday, the exchange said that brokers paid their margin in full.
Tsingshan still owes money to its brokers, which included JPMorgan, Standard Chartered and BNP, as well as a division of state-owned China Construction Bank Corp., some people familiar with the discussions said. Earlier, Bloomberg News reported on negotiations with creditors.
“In the interest of systemic stability and market integrity, we have suspended the market as soon as we can and canceled trades from the point where the LME no longer believed that prices reflect the underlying physical market,” a spokeswoman said. She said the exchange is working to open the market as soon as possible.
The company that sparked the crisis was founded in 1988 by entrepreneur Xiang Guanda and his wife He Xiuqin as an automotive glass manufacturer. Xiang remains the majority shareholder of Tsingshan, one of China’s largest private companies.
As China’s economy accelerated in the 2000s, nickel availability became a hurdle. China’s insatiable appetite for steel furnace metal saw prices top $50,000 a metric ton in 2007, a record until last week.
Sacks of nickel ore in Indonesia in 2012. Nickel prices more than doubled last Tuesday to hit a record high of $100,000 a metric ton.
Photo: Yusuf Ahmad/Reuters
Tsingshan, a stainless steel manufacturer, has solved China’s nickel shortage by introducing rotary kiln electric furnaces to produce a cheap material known as nickel pig iron. This event affected prices and was seen by the local media as a victory for the Chinese steel industry.
China’s Belt and Road Initiative, President Xi Jinping’s flagship infrastructure strategy, has fueled Qingshan’s growth. In 2013, Mr. Xi and then Indonesian President Susilo Bambang Yudhoyono attended the official opening of one of Qingshan Industrial Parks in Indonesia.
Metal producers typically sell forward contracts on exchanges to lock in prices, which is known as hedging. Tsingshan, however, has been selling and buying nickel contracts for the past decade, people familiar with the company say, making the activity more like trading.
The company began accumulating a short position early last year, people said. He has made statements on his website and panels that the market is on the rise and prices should fall. Traders, bankers and analysts estimated that Tsingshan’s position was equivalent to selling about 190,000 metric tons on the LME. At last Monday’s closing prices, that would have been worth $9.1 billion.
Email Joe Wallace at [email protected], Rebecca Feng at [email protected], and Jing Yang at [email protected].
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