Nickel - An Uneasy Path
Update on the Nickel Market
Nickel is vital for stainless steel and rechargeable battery production. In 2020, Russia was the largest exporter of nickel, accounting for US$ 3.2bn worth. So, when the Russians invaded Ukraine, the world nickel market was and to this day is one of the worst hit. The wave of sanctions pushed the price of nickel to a record $100,000 per tonne on 8thMarch 2022, a 250% increase in 24 hours. For the Chinese company ‘Tsingshan Holding Group’ and its founder Xiang Guangda, the largest producer of stainless steel and nickel, a short position meant an exposure of billions of dollars, with an estimated position size of over 100,000 tonnes.
Solutions: Buyback or Swap?
The dubbed ‘Nickel Tycoon’ cut back the short position, to reduce Tsingshan’s exposure, however this buyback has an estimated loss of $8bn. The London Metal Exchange (LME) suspended trading on 8th March for a week, for the first time in 30 years, and placed a 15% cap on price fluctuations. In addition, the LME cancelled all trades that occurred on the 8th of March, in a bid to support smaller companies going bust, naming ‘unprecedented events’ as the culprit. Naturally, outcry followed this with profits wiped away, questioning the integrity of the decision. The closing price on 7th March 2022 was much less than the all-time high recorded on 8th March, at $48,063 per tonne, however still high enough to cause Tsingshan severe losses.
Even after the buyback, the short position remained around 60,000 tonnes. However, Tsingshan agreed with its banks they would not force anymore margin calls, a demand by a broker for funding when the position suffers a loss. It acts as a form of collateral for the banks; however, the magnitude of these margin calls was unpayable by the company.
The other option Tsingshan had was to deliver physical metal, in an exchange to swap the low-grade nickel produced by Tsingshan for the high-grade nickel required to be delivered in LME warehouses. This will also close the short positions it holds. China’s state stockpiles hold an estimated 100,000 tonnes of nickel, which could be used to help the company.
Beijing Hede Fund Management
On the other side of the story, some funds did manage to secure huge gains from the price rise: those with long positions. One of these is a Chinese hedge fund by the name ‘Beijing Hede Fund Management’, which managed to get a 432% return through 27th May 2022. This was noted to be the highest among Chinese futures funds. This was mainly driven by the belief of many hedge funds that the price of nickel would increase due to both a boom in the electric vehicle industry and predictions about supply shocks lifting prices.
This is just one example of a hedge fund, relatively small, managing about $75m which built its position of up to 40% exposure. This position started on February 18th 2022, before the invasion of Ukraine.
Legal Action
Most recently, on 6th June 2022, a US hedge fund ‘Elliott Management’ has sued the LME for over $456m over the events on 8th March 2022, when trading was cancelled. The grounds of this complaint is that the LME acted out of the bounds of its power, doing so unreasonably and not following the fairness a market should provide. It is likely others will follow suit, building a strong case against the LME, whose rebuttal will follow the lines that it acted accordingly with the abnormal price moves and in the best interests to keep the exchange fair. The grey area lies whether suspension of trades is really a power the LME can wield, and whether there is some influence by the LME’s parent company HFEX.