Historic one day price moves in Nickel freeze physical markets and force the LME to take action. What happened and what does it mean?
Written by: Bentley Atteberry & The Myst Capital Metals Team
March 8, 2022,
Russia's "special operation" in Ukraine triggered a global tightening across the global commodity markets. A few weeks back we pointed out an insights piece (review here) that Nickel was set to be one of the most impacted commodities if Russia or Ukraine were cut off from the global markets. Russia was the largest exporter and second largest producer of Class I Nickel with several Nor Nickel brands deliverable to LME or SHFE warehouses.
Outside of this event, we have maintained a medium to long term bullish outlook on Nickel since the large sell off in March of 2021 on the back of an announcement from Tsingshan that they have successfully converted Nickel Pig Iron into high-grade Nickel Matte to be converted into sulphates for EV Batteries. This outlook drove us to maintain a slightly overweight position in the alloy and battery metal.
When Russian forces first crossed into Ukraine on February 24, 2022, markets began to price in supply constraints. Nickel was surprisingly mixed at first but intra-day volatility was high. From close on February 28 to the close on Friday March 4 (LME Kerb close at 17:00 London time), benchmark 3-month prompt Nickel prices had jumped over 19% to $28,835 per tonne. While this was a large move, it was done in a somewhat orderly manner and we considered that rise in price expected and fundamentally driven due to the tightness in the Nickel markets and merchants/downstream consumers no longer wanting to touch Nickel products due to fear of sanctions. During this sort of volatility, we like to look into physical/spot market transactions. Reports were of some hesitancy by downstream to purchase spot metal, however some transactions were still taking place. This told us that downstream, or at least merchants that purchase for downstream consumers, were still accepting these higher prices. Typically, sharp moves in markets may cause end users to hold off on purchases. Large price moves over longer periods of time are much easier for downstream to accept and pass on. Late Friday afternoon, the LME snuck in a notice that margin for Nickel contracts were to be increased by 12.5% (effective Tuesday, March 8). We found this to be interesting since at this point, there was nothing too alarming quite yet. That all would change come Monday though with red flags popping up left and right.
Come Monday morning (Sunday evening in Europe and North America), something seemed different in the commodity markets, especially Nickel. Within the first hour of trading, 3-month Nickel was trading up over 14% from Friday's kerb close. An hour after that, Nickel futures in Shanghai (SHFE) went limit up (15%). Some form of market was still functioning, but not for very long. By afternoon in Asia (morning in Europe), producers had lifted offers and consumers/merchants were no longer willing to chase prices higher. The physical/spot markets had seized up as both sides stepped out to take a wait and see approach. LME Nickel prices just kept marching higher though. A clear red flag that something far more was going on.
By 9am in London, Nickel was at $37,000 per tonne, up 28.3%. Up until the second ring session, price action had not been very volatile given prices already up around 30%. During the ring session though price shot above $46,000 (62% gain from Friday) before almost immediately retracing back down to just over $40,000. By this point, it was pretty clear that something beyond regular market fundamentals was unfolding. While we typically have no issues with short term non fundamentally driven moves and sometimes even see them as tactical opportunities, we felt this was a bit too extreme. By the early afternoon hours in London, prices began to march higher towards $50,000 once again. At that time, we made the discretionary decision to take a step back and by effectively closing our long Nickel position.
Nickel prices would go on to further gains later in the day before paring back to around $48,000 per tonne at the close. The March 8th open picked up where the prior day left off with prices at one point breaching $100,000/t before the LME finally stepped in and suspended the trading of Nickel.
What happened? What Next?
First, I would like the point out that only a limited few people actually know what entirely occurred. Additionally, while an event or two might be a headline grabber that everyone focuses on, it is more than likely that multiple factors lead to the historic squeeze with multiple entities scrambling to cover.
Initially, we thought the squeeze was sparked by the spread between LME Nickel and SHFE Nickel. China prices (SHFE) had been lagging ex China prices for much of the beginning of 2022. This led to a deepening in the negative import arbitrage into China (shown below). The logic in playing that spread would have been that a negative import arbitrage means less metal may flow into China and instead head for Western end users or LME registered warehouses (there are several throughout Asia). This sometimes can lead to Chinese producers or merchants exporting from China to an LME warehouse in Asia as a way to take advantage of the price difference (similar to what we discussed in our Lead Insights). One way to play this scenario unfolding would be to short LME Nickel and Long SHFE Nickel. When LME Nickel kept moving higher and SHFE Nickel was stuck at limit up, that most certainly would have caused pain to anyone in that spread possibly forcing them to cover. There is a larger issue with the logic of playing that spread, particularly in the Nickel markets. A majority of nickel produced is actually in some form of ferro-nickel and not actually deliverable against an LME or SHFE contract. Additionally, SHFE does not accept Nickel Briquettes as a deliverable grade while briquettes make up a majority of LME inventories. This leaves very little available metal to actually take advantage of such a thing.
While many producers may not actually be able to deliver against their production, they will still use exchange to hedge. Contracts for sales and purchases of the various Nickel products will often be settled using exchange prices plus a premium or minus a discount depending on the particular product, brand, or grade.
A prime example of this comes from the largest Nickel producer in the world, Tsingshan. Reports began to float around last month that Tsingshan had built a fairly large short position. Xiang Guangda, known in the industry as "Big Shot" and Chairman of Tsingshan Holding Group, has been known to be bearish the price of Nickel ever since they (Tsingshan) developed the process to convert Nickel used for Nickel Pig Iron to a high-grade Nickel Matte that can further be processed into a sulphate to be used as a precursor cathode active material (PCAM) for EV batteries. Wood Mackenzie has calculated Tsingshan's cost of producing this high-grade nickel matte to be around $12,000/t. Logically, with prices hovering around $20,000/t hedging off a large portion of production would make sense (hedging for a producer would be a short). The size of Tsingshan's short remains unclear at this point (we have read anywhere from 160,000-300,000 tonnes) and the remaining size of their short remains unclear as well. With that said, Tsingshan produces around 600,000 tonnes of ferro-nickel products per year and were expecting to deliver up to 100,000 tonnes of high-grade nickel matte products in 2022. So why would they need to buy back their shorts?
In theory, they would not need to, however, since their production is of ferro-nickel products that are non-deliverable against exchange contracts, rises in price would require them to put up significantly more margin potentially impacting their availability of cash.
While this is the most popular story talked about as the culprit, we remain in the belief that there were many factors and parties leading to the squeeze.
What does this mean for the Nickel markets moving forward?
Well, that also remains to be seen. For now (March 8, 2022), the LME Nickel markets remain suspended. The LME also decided to cancel all trades that took place after 0:00 London time on March 8th. There is still Nickel trading taking place on the Shanghai Futures Exchange (SHFE). Prices there still sit at limit up around 43% higher than Friday's close. Additionally, trading on MCX (India) has continued with the front month Nickel contract for March delivery settling at 3,500 Rupees/kg on March 8 (about $45,500/tonne).
While the Tin crisis of 1985 immediately comes to the front of everyone's mind at a time like this, it is important to note that back then, there was no clearing house for LME brokers. Today the London Clearing House (LCH) is one of the largest in the world and currently there are not any major red flags coming out of there.
We will continue to monitor the Nickel markets and developments at the LME over the next several days or weeks.
For a further breakdown and explanation on the events, Andy Home put together an informative piece here: Column: LME nickel trading halted as big short hits big trouble | Reuters Also, feel free to Contact Us with any questions or concerns
UPDATE: March 8 ~ 19:30 GMT: LME Announced that they do not anticipate the resumption of Nickel trading earlier than the 11th of March 2022 and that the date of resumption will be announced no later than 14:00 UK time on March 10th.
By Bentley Atteberry & The Myst Metals Team
Myst Capital offers market research and commentary. Our market research is intended to simply be insights, commentary and research for those who are interested in this information. This research is not a solicitation for investment with Myst Capital nor should such market research be construed as trading advice to buy or sell any specific financial investment. The above commentary, insights, and research may or may not fully represent the opinions of the entire Myst Capital team and is not intended to be indicative of any investments.
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