Risk Management in Volatile times - Nickel LME & Tsingshan Holding Group
Nilesh Patil
Senior Commodity Trader | Corporate Strategy | Biofuels & Feedstock Origination | Carbon Markets & Sustainability
Futures market is to discover the correct price for a commodity. But in the case of LME nickel this month , everyone — or, at least, everyone running the LME — sort of looked around and said “well this is not the correct price of nickel now is it.” (The chief executive officer of the LME said that the trading prices “were becoming disconnected from, I believe, physical reality.”) The LME, and many big metals traders, decided that the correct price of nickel was not $100,000. So the LME canceled last Tuesday’s trades — a drastic step that took away the profits and losses many traders had made on nickel that morning — and rolled the price back to $48,078, where nickel had closed before infamous 7th March short squeeze.
Some question to the Risk team at LME - Why no upper circuit or limits to price movements which are abnormal ?? Example - CME Group’s Comex exchange, on which copper and gold trade, halts trading if prices move 10% within an hour.
The LME has for years epitomised the United Kingdom's light-touch regulation of its financial services sector but a history of last-minute intervention in disorderly markets looks to be over. The last few days have brought time-spread caps, daily price limits and cancelled contracts.
Back story:- Tsingshan has figured in market swings before.
?Last year, it triggered a price drop with surprise news that it would provide nickel matte to battery materials makers, potentially solving a key bottleneck for electric vehicles by boosting battery-grade supply in a cheaper way.
?Betting prices would fall, Tsingshan started building a short position last year. The bet backfired partly as Russia's invasion of Ukraine sent metals prices soaring, putting pressure on holders of big short positions, including Tsingshan.
?"Markets sensed that (Tsingshan) were going to make a move, but they probably made it too early ... a quarter or so too early and nobody was expecting what happened in Ukraine," said Angela Durrant, Wood Mackenzie's principal nickel analyst.
Tsingshan has to either pay off the outstanding short positions, which could be as high as $8 billion, or prove it has sufficient deliverable nickel to repay in kind.
Quite a tone of question to the Risk team at Tsingshan Holding Group. Which systems are they following? Etc. But what LME did by closing the market and cancelling the trades of 7th March and following day has set quite tough terrain for everyone to walk. No trader can claim that they perfectly hedged the commodity, nor market makers who themself are swimming naked.