Traders, brokers and clerk on the trading floor of the London Metal Exchange (LME) Open Outcry on February 28th.
Photo: Chris J. Ratcliff / Bloomberg News
Market turmoil during the war is not uncommon. However, the retroactive cancellation of nickel trading by the London Metal Exchange this month seems unprecedented. One question is whether Hong Kong-owned exchanges have intervened to rescue China’s nickel tycoons.
Nickel prices have risen for most of the year before Russia’s invasion of Ukraine amid rising demand for electric vehicle batteries and stainless steel. Russia supplies about 20% of the world’s finest nickel, and prices have risen due to concerns about sanctions. This threatened the Kiyoyama Holding Group, which had a large short position.
Tsingshan is one of the largest producers of nickel and stainless steel in the world. It is also the basis of China’s Belt and Road Initiative, which seeks closer relationships with poor countries by developing natural resources.
Tsingshan Chairman Xiang Guangda has a history of moving the market. Nickel prices have fallen after Aoyama announced last year that it had developed a breakthrough technology that would allow cheaper intermediate nickel to be used in batteries. This could increase the supply of nickel available for batteries and reduce prices.
Many investors suspect that Mr. Sho has taken a short position in his plans to flood the market with nickel. But then, as prices rose during the Russian invasion, his brokers struggled to respond to margin claims, which bullish investors took advantage of. Nickel prices soared 250% in a short squeeze before the LME closed and canceled the deal.
The Journal reported that Tsingshan would have been in debt of $ 15 billion without LME intervention. Kiyoyama could cover its short position by delivering high quality nickel to the exchange, which would probably require the Chinese government to replace its high grade reserves with Aoyama’s low grade nickel.
By canceling the transaction, LME effectively rescued Tsingshan and Beijing. If the price fluctuates, the exchange may suspend trading but will not invalidate the contract. Some traders speculate that the owners of the LME on the Hong Kong Stock Exchange felt pressure from Beijing to do so, if not explicitly.
The LME blamed the lack of visibility in over-the-counter contracts and explained that market movements were unprecedented. LME CEO Matthew Chamberlain denied China’s pressure, saying this week the exchange “intervened because of the size and systematic impact of its clients. They would have done it regardless of their nationality.” Stated.
This explanation is unreliable. Kiyoyama may have lost billions of dollars, but it wouldn’t have destroyed the nickel market. When the Hong Kong Stock Exchange acquired LME in 2012, there were concerns that it could be vulnerable to China’s political influence. The LME is seeking approval from China to open a metal warehouse on the mainland.
Nickel trading resumed at the LME last week and circuit breakers were used to prevent significant price volatility, but there were a lot of technical problems. This blunder closed some traders, reduced market liquidity and damaged the LME’s reputation. Cliff Asness, founder of AQR Capital Management, tweeted: This is one of the worst I’ve ever seen. “
Without investor trust, the market cannot function efficiently. If the LME does not recover the canceled transaction, UK regulators need to investigate what happened and why.
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Appeared in the print version on March 23, 2022.