These are scenes that traders in the long history of the 145-year-old metal exchange in London have not often seen. Due to a price explosion of some 250 percent, nickel trading on the London Metal Exchange (LME) was halted in March – a rarity in itself. The immediate cause was Russia, which had to deal with Western sanctions because of the invasion of Ukraine. This caused unrest about deliveries from Russia, a major nickel exporting country. It became really unusual when a large number of orders that had already been completed were subsequently canceled with retroactive effect.
Not everyone accepts that decision by the management of the LME. The American hedge fund Elliott and trading house Jane Street are claiming damages of respectively 430 million euros and more than 14 million euros in lost income due to the suspension of the nickel trade and the reversal of orders worth a total of approximately 3.7 billion euros.
How the LME came to its decision? This has everything to do with the so-called short squeeze which had arisen as a result of the exceptional price jump. Such a short squeeze occurs when a speculator bets on a price decline (‘going short’) but this turns out wrong because suddenly a lot of demand arises. In the case of the nickel market, speculators – including CEO Xiang Guangda of the Chinese steel company Tsingshan – were forced to make quick deposits to maintain their trading position (a margin call named). Or they chose to close their short position, which can only be done by buying nickel. The result: even more demand for the metal, and therefore even higher prices. Whereupon the LME rigorously decided on a trading freeze on March 8, so that parties that had gone short were given time to hedge their positions.
Artificially lowered
Trading resumed a week later at an artificially reduced price. That was good news for nickel traders like Guangda, bad for Elliott and Jane Street. Almost immediately afterwards, trading was suspended again, because the maximum price change was reached in one day. In addition, technical problems arose in the trading system that hindered trade.
“Many futures markets have mechanisms that suspend trading when prices shoot up or down too aggressively,” said Nitesh Shah, a commodities analyst at wealth manager WisdomTree in London. “The LME had not experienced such circuit breakers before March 15.” According to Shah, trade interruptions are a rarity in the metals exchange, let alone one of this magnitude.
Also read: Unprecedented nickel boom brings London trade to a standstill
Asset manager Elliott – known in the Netherlands as an activist shareholder of paint and chemical company AkzoNobel – believes that the LME “acted illegally by canceling transactions”. She told the British press that the stock exchange “exceeded powers, or exercised them unreasonably and irrationally”. The LME also allegedly considered ‘irrelevant factors’, including its own financial position. Handelshuis Jane Street added that the cancellations “set a dangerous precedent.”
The metals exchange, part of the Hong Kong exchange HKEx since 2012, defends its decisions by pointing to the “disorder” in the market, with prices that did not reflect the physical market. The LME called the allegations unfounded and said it “will vigorously contest them.”
“This is something I have not seen before,” said ING analyst Warren Patterson of LME’s cancellation of the orders and subsequent claims. “However, the LME found itself in a difficult situation given the level of volatility and the need to bring some order back to the market. Negligence would also have resulted in serious liquidity problems for some key market participants.”
The LME’s choices have sparked frantic discussions in the City of London. Could this fiasco have been prevented? Has parent company HKEx influenced decision-making out of self-interest? Have some speculators gotten off too easy with reversing trades? And have these angry ‘hedgers’ indeed lost millions unjustly as a result? Answers to all these questions must also come from the consultancy Oliver Wyman, which has been appointed by the LME to conduct an independent investigation, in addition to the judge.
Under strict supervision
But even if Elliott and Jane Street lose their claims, the case is presumably not over. The LME is under the spotlight of regulators due to the nickel debacle. They want to know whether the current supervision is still sufficient in what, according to critics, are shadowy mutual (over the counter) commodity trading, and whether there is a level playing field for traders. It is known that in any case the British stock market regulator FCA and the British central bank will issue an external assessment on the suspension and resumption of nickel trading. In addition, the LME – which has already agreed to appoint additional independent directors – will have to demonstrate whether it has acted transparently, and indicate how trade stops can be prevented in the future.
This is also important in view of the high demand for nickel. The metal is an important ingredient in stainless steel, which is used in everyday objects and appliances. In addition, nickel is needed for the energy transition. “It is an almost indispensable element in battery technology,” explains sustainability economist Casper Burgering of ABN Amro. “There are different types of batteries with many different compositions of metals. But nickel is always one of them.” It is therefore expected that a larger part of nickel consumption (currently about 7 percent) will soon be destined for the battery sector.
Meanwhile, geopolitical issues continue to play a role in the nickel market. Russia is a major exporter of nickel and has now struggled to access international markets due to Western sanctions imposed as a result of the invasion of Ukraine. Burgering: “And with the company Nornikel, Russia has the largest producer of refined nickel in the world. Then you have sufficient market power to cause a shock in the nickel market.”
#Chaos #claims #London #nickel #market #wrong