Short Squeeze nickel market causes mayhem on LME
Chaos and panic on the London Metal Exchange or in short “the LME”. Nickel trading was halted last week, previous transactions reversed. It is an extremely exceptional move for the 145-year-old institution.
Bizarre price movements
The price movements on the LME market for nickel were astonishing. ?The price for this metal, which is widely used for stainless steel and rechargeable batteries, shot up to over $100,000 per ton on Tuesday morning at a breathtaking pace. The previous Friday, it was still around $29,000. These kinds of moves are downright bizarre. When the LME halted trading, a ton costed $80,000.
The reason for the rise in nickel was simple: traders and buyers were afraid of shortages because Russia is a major exporter of this metal. However, the answer to the question of why nickel in particular could get so out of hand is a lot more complicated. It has to do with how the game is played on the commodity futures exchange, in this case a "short squeeze".
Going Short
Investors who speculate on a fall in prices are called "short sellers" in jargon. Short positions are widely used by commodity producers. They use them to hedge the risk of a drop in the price of their inventories. This works well as long as the market does not move too fast and the positions are not too large. In the case of nickel this went very, very wrong last ?week.
The world's largest producer of nickel and stainless steel, Chinese company Tsingshan, has built up an enormous short position in nickel. The owner, a Chinese billionaire nicknamed Big Shot, was betting on a price drop. Nothing turned out to be further from the truth and Tsingshan owner Xiang Guangda is now facing huge losses.
On paper, that is. If Tsingshan can deliver enough nickel in the future, it can still make up for the losses on the short position. But the exchange and clearing want to see immediate collateral, proof that the short seller can bear the potential loss.
The alternative to meeting these margin calls is to close the short position, but this can only be done by buying back nickel futures. These additional purchases would further inflate the price, causing problems for even more parties with short positions, leading to even higher prices. A so-called "short squeeze", taken to the extreme in the nickel market.
One thing is certain: commodity traders will be watching with suspicion what happens when the nickel market reopens in London. Tsingshan has meanwhile taken out a package of loans from Chinese and international banks. These should help the company meet its margin calls, or collateral deposits to cover positions. Xiang Guangda is said to have assured the banks that his company can continue to meet its obligations.
The billion dollar question is: can this also happen in other commodity markets?
Prices for aluminum, which is also traded on the LME, have risen to record highs in a short period of time. Here it is also true that supply was already tight before the war in Ukraine and that Russia, of all countries, is a major exporter. But there is much more liquidity in the aluminum market than in the nickel market. The same is true for the oil market. Making a repeat of what happened in the nickel market highly unlikely. Most markets, including the oil market, are just too big to be dominated by one party.
Source: FD