“Big Shot”- An enthralling saga- but eclipsing inconvenient truths?

The attention grabbing headline reads, “Tycoon whose bet broke the nickel market walks away a billionaire”- a gripping tale without doubt.

Authored by Bloomberg reporters Jack Farchy, Mark Burton and Alfred Cang- all journalists of justifiably excellent repute especially in the area of commodities, the piece is related in a narrative capturing the freewheeling excitement that reprises the thriller ethos so marvelously generated in Jack Farchy’s brilliant and much lauded opus, “The World For Sale”, which he co-authored with his Bloomberg colleague, Javier Blas.

The activities of their protagonist, “Big Shot”, Xiang Guangda, owner of leading nickel and stainless steel producer, Tsingshan Holding Group Co are graphically revealed- Big Shot, even the soubriquet positively reeks of Bond’s Goldfinger villain,(with the added bonus that a quick scan of the name subliminally vies with Big Short) sets the scene for the wild ride and allegedly outrageous denouement where our knavish lad’s shenanigans gets the better of all comers, complete with the old saw of if you owe bankers a $1000 you’ve got a problem, if you owe them a billion, they’ve got a problem,(well, everyone loves to see those dastardly bankers get a pasting)-and in the final take, Big Shot apparently cleans up by walking away with billions. It’s a truly enthralling if troubling saga.

The piece is undoubtedly, as with all these reporters’ work, excellently researched- one imagines that there must inevitably be an element of hearsay in respect of the details of that fifty bankers meeting, and therein lies an aspect of the rub of fictionalizing factual stories, because it touches on that fundamental of fiction- the suspension of disbelief. The much acclaimed series, The Crown provides and excellent example of the dilemma of juxtaposing fictional portrayal of factual events.

Which brings me to the caveat of inconvenient truths…..

Before proceeding, and with apologies, it is necessary to address for the benefit of the less initiated with a rather prosaic but crucial explanation of one of the primary and core functions of the L.M.E.- the role that the market plays in providing a vital risk mitigating function for the global metals industry by enabling users to reduce their price risk exposure by offsetting their unpriced contractual obligations where the L.M.E. prices ultimately benchmarks their transactions- in other words by hedging via L.M.E. futures contracts they can achieve an insurance that compensates a loss or profit of the futures contract with an approximately equal and opposite gain or loss when they eventually price their physical shipment transaction.

While these futures transactions can provide risk mitigation whether you are making or taking delivery of metals, typically futures hedge sales on the L.M.E. are predominantly for those shipping metals and are thus hedge sales on the Exchange. The critical point is that these are Hedge Sales- NOT “Short positions”- short positions are indeed speculative open exposure “bets”, the success of which depend on the market falling.

So much for the technical distinctions, which while mundane are the very essence of the factors that were relevant not just to Tsingshan’s activities, but both the role and impact on the plethora of other global metals trade hedgers who became collateral damage in the nickel crisis debacle as well as the actions and role of the L.M.E. itself in this dramatic tale. ???

There has been much speculation, (forgive the pun), as to the extent to which Tsingshan’s sales positions on the L.M.E. were a speculative Short bet and/ or a partial or indeed full hedge of their open price exposure to their underlying vast physical nickel production, the assessment of which is further discombobulated by the offset of their use of that nickel as a major stainless steel producer.

I raised this aspect in conversation with Jack Farchy recently in my role as host of the B.I.R.’s bi-monthly show The Challenge in our live edition broadcast from the B.I.R. annual convention in Barcelona in May, where Jack was our special guest featuring his tremendous business best seller, “The World for Sale”, our exchange regarding the nickel crisis, which was a small element of an overwhelmingly laudatory discussion of his book was a vigorous but entertaining riposte of views, albeit to a little consternation of my fellow Amigo co-anchor contributors of “the grilling” and is available free to view on the B.I.R.’s website- www.bir.org.

Even if due diligence is applied, (which to date has not I believe been undertaken- even if actually feasible)- the extent to which Tsingshan’s L.M.E. sales positions were hedges or speculative short “bets” are unlikely to be definitively established, but the constant and overwhelming portrayal of that activity as a vast short bet, are to say the least pejorative.

Moreover, it is certainly not unreasonable to infer that given their position as a major leading nickel producer, it may suggest that a significant if not indeed overwhelming majority of their production would be exposed to price risk fluctuation if they did not take out that risk mitigation insurance by equal and opposite futures hedge sales on the Exchange- thus the alleged billions Big Shot made on the eventual prices they were closed out at would offset the equal and opposite loss of the value of their hitherto unpriced nickel production- a very different situation from the vast suggested speculative windfall that has been implied.

So much for Big Shot, though it is worth noting that although in absolutely no sense am I suggesting that the writers had the remotest intention to do so, while not wishing to be Woke,(which by inclination I most certainly am not), it is a little troubling that given historical stereotyping dramatic precedents, the pastiche of Xiang Guangda, Big Shot conjuring in the minds of some as a Bond-esque fiscal Odd Job figure, while the yet to be addressed player, Paul Singer enjoys no such fictional counter-part,(except by implication maybe as Good Job) is perhaps unfortunate.

Before examining the role of the litigious Mr. Singer, it is time to address the actual events surrounding the crisis that erupted on the L.M.E. in early March.

It is unquestionable that at that time for a number of reasons the commodity markets assessed that a broad consensus believed that a demand surge would imply a general swathe of higher prices, this was exacerbated in the case of nickel by belief that the supply demand balance would be significantly altered by battery demand focused on the burgeoning production for the electric vehicle industry- such change in fundamentals was not however the result of some singular epiphanic moment- rather the technical vulnerability of Exchange established hedge sales provided a pretext for financial rather than metals trade players to embark on a classic squeeze of the nickel futures sales positions on the L.M.E. culminating in buy orders on the exchange, much of which and arguably strategically and opportunistically emerged in the thinly trading Asian opening trading hours with a gargantuan uptick to, as it transpires given current prices, utterly unsustainable aberrational prices.

The consequences of this raid had both immediate and even more disturbingly long-term implications both specifically for nickel, but also to a lesser but marked degree in all base metals at that moment.

Irrespective of the main target of this squeeze being focused on Tsingshan’s positions, the raid inevitably resulted in the forced closure of the legitimate hedge sales positions of a vast array of global metals trade users of the L.M.E. as a result of the enormous margin call demands and their rapid exhaustion of their established credit line limits with their L.M.E. brokers. This sitauation resulted not only in the forced closure of their futures positions with consequent enormous losses on their futures position without physical unpriced offsetting gains, it created a new unquantifiable price risk exposure to their unpriced physical positions, but also as a further consequence occasioned such a disruption in the physical markets that many trade consumers and suppliers disengaged from activity due to the un-hedge able situation and uncertainties of the base metals L.M.E. global price bench marking role. In short a catastrophe for many innocent legitimate trade hedge and benchmarking users of the Exchange and its pricing quotations.

While there are many precedents for such classic damage inflicting squeezes, the actions and authority of the L.M.E. to such abusive and predatory activity by the perpetrators have previously both deterred and rectified flagrant abuses, certainly of such encompassing magnitude.

Much consternation and outrage has accompanied these events- ranging from reasoned and balanced differing but professional views of cause, effect and questioning of appropriate actions, but regrettably also much hysterical, often ill- informed and downright intentionally incendiary commentary has occurred, despite the overarching need for a responsible, measured and thorough due diligence approach, which is crucial in seeking to objectively apportion responsibility, remediation and future process adjustments.

So, what is puzzling, indeed troubling, is that while enormous attention has been paid to the role of Tsingshan in general and Xiang in particular, and his depiction as a wily operator, despite the incontrovertible truth that whether they are accessories, or aggrieved entities, those parties were unquestionably the primary the target of the squeeze. In such instances typically substantial invigilation would also indeed primarily accordingly be focused upon the actions, detail and role of the perpetrators of the raid. Yet, while vast column inches, nay yards, (or meters as you will), have been devoted solely upon the target, while up to now the dearth, actually lacuna of information of the names, ranks and roles of the “Squeezers” is almost totally absent.

The Singer and his song: Well, we have of course heard a deal of the injured outrage of the lead Singer- Mr. Paul Singer, who is valiantly upholding the grievously trammeled interests of both his own firm, and it is said representing also the wider interests of all those so inaptly entitled as “hedge” funds,(or does the term hedge now take on a new hitherto unrecognized meaning in being their target focus?). Mr. Singer is litigating against the L.M.E. for obstructing them from their gotten gain trades, albeit at comprehension defying close out prices that they instigated as they stampeded those margin call panicked buyers- understandably frustrated as they may indeed be, by the L.M.E.’s cancelled trades ruling, but their professing moral probity and outrage is really pushing suspension of disbelief.

Much has been made of the role and actions of the L.M.E. in this affair- again objective evaluation is required, but with much of this presumably sub judice given Singer’s and others litigation efforts patience will I suspect be at a premium.

It should however, be noted that there has been some appallingly inappropriate depictions of the Exchange even from leading organs of the financial press- one for example focusing commentary not on the crisis per se but attempts to frame the Exchange and its members as a bunch of louche, ignorant and venal toffs- a sort of collective BJ if you will- even fifty five years ago, when I was first on the Ring,(and a long haired blues wailing rebel in the older generations eyes), the toffs were few and far between- today the Exchange is the very model of ESG probity, yet pointed references to past raucous after annual dinner impropriety is so much more click worthy than in depth diligence of the real crisis issues, unless of course the true agenda is to so defame the L.M.E. as to justify its early demise. ???

Contrasting opinions as to where blame for the crisis should be apportioned will surely and justifiably endure, but certainly some unpalatable truths are undoubted- if the premise long established and clearly espoused remains that the London Metal Exchange primarily serves the global metals industry as the basis for bench mark pricing of an unapparelled range of base metals far beyond its own on market transactions, and as such it also provides the means of hedge risk mitigation and in many contracts last resort means of making and taking physical delivery- the disruption caused by the nickel crisis and its wider ramifications have undermined these vital functions as a result of abherrent activity incompatible with the fundamental objectives of establishing unmanipulated fair and reflective pricing of the commodities traded. Without question the nickel crisis has disrupted these functions- the essential need and challenge now is to restore full legitimate faith in the Exchange, which currently remains a vital and essential tool of the global metals industry.

The L.M.E. has the responsibility for ensuring that the credibility and integrity of the market and all its participants is assured, if there ever was ambiguity of the Exchange’s right to adjudicate and ensure the functioning via its rules including ensuring its transactions are free from abherrent manipulation and canceling trades so deemed, which candidly was debatably already crystal clear- going forward users can certainly no longer harbor under any such misapprehensions. ?

To that end thorough and relentless investigation of both the causes and effects of all aspects of the nickel crisis are crucial to achieving restoration of integrity and faith in the Exchange and its vital place in the global metal industries ferment- the quoted observations of the highly regarded veteran analyst and commentator, Jim Lennon of a dramatic decline in bench mark usage of the L.M.E.’s nickel and likely other base metal contracts for global transactions,(with its implied enhanced pricing risk exposures) militates the urgency of such complete transparency and resolution.

Thus to conclude- I express my earnest and emphatic encouragement to the authors of their recent article: from my personal interaction over many years, I have gained enormous professional and personal regard for Jack Farchy and his investigative journalistic talents, likewise Mark Burton- your research into Xiang and Tsingshan’s activities have indeed been fascinating and revealing, but in the interests of balance, objectivity and transparency I urge you all to now apply the same relentless and intrepid due diligence to investigating and reporting in full detail and depth the role, actions and activities of all those financial players,(hedge funds, Algos et al)who participated in the events surrounding this disturbing nickel saga, because only then can a clear path to a secure future for all interested parties be realized.