Inside the nickel market failure: massive exchanges that the exchange hasn’t seen

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Inside the nickel market failure: massive exchanges that the exchange hasn’t seen


LONDON – The war in Ukraine broke the nickel market. The risks had been growing for years.

Banks and brokers have lent a lot to manufacturers and speculators eager to take a stand on the humble metal, a key ingredient in stainless steel and electric vehicle batteries.

The London Stock Exchange, where metals have been trading for 145 years, did not see the growing danger.

“The simple fact here is that we didn’t have visibility into the magnitude of the risk,” said Matthew Chamberlain, chief executive of the London Metal Exchange.

The LME’s response to the crisis threatens its dominant position in the global metals market. It lingered when the nickel trade spiraled out of control on March 7, then suspended the market and canceled $ 3.9 billion in transactions the next morning, infuriating traders who had bet on the nickel price hike.


Will the LME be able to curb movements in nickel prices and protect its members?

The shutdown left rudderless nickel companies for over a week before limited and chaotic trading resumed Wednesday. The market was glitchy, with prices dropping to the daily limits just imposed by the LME. Some trades went below these levels, including early Friday, leading the LME to cancel more trades.

“This kind of behavior in a market diminishes its appeal as a free market and as a global pricing mechanism,” said Michael Farmer, a hedge fund manager known as Mr. Copper.

The Nickel explosion has rebounded on the markets. Tsingshan Holding Group, the Chinese nickel producer at the heart of the crisis, owed a bank and brokerage raise of $ 4.5 billion in margin payments related to its trade after the LME scrapped nickel trades on March 8 people familiar with the talks between lenders said. The amount of the exposure to banks has not been reported previously.

A worker separates nickel ore from other elements in a processing plant.


Yusuf Ahmad / REUTERS

The banks, led by JPMorgan Chase & Co., and including Standard Chartered PLC, BNP Paribas SA and several Chinese banks, are in talks to refinance the trade to prevent further damage. Spokespeople for JPMorgan, Standard Chartered and BNP Paribas declined to comment.

Demonstrating how out of control the market had become, if the London Metal Exchange hadn’t canceled hours of trading and allowed prices to exceed $ 100,000 a ton, Tsingshan would have owed the group around $ 15 billion, a person familiar with the trades. said.

When Russia, one of the largest suppliers of nickel in the world, invaded Ukraine, prices for the metal rose due to concerns over supply disruptions. This caused Tsingshan to lose billions of dollars of positions in the nickel market. Some Chinese manufacturer brokers at the LME have furiously tried to get out of positions by buying nickel, creating a squeeze.

Only 20% of Tsingshan’s exposure to nickel was fully visible at the LME, the person familiar with the trades said. The rest of the trading was done in private arrangements known as over-the-counter deals with banks, according to people familiar with the trades.

Critics of the LME say it should have seen the explosion coming anyway. Tsingshan started building a large short position last year and the contours of the trade, if not its size, were known in the market. Public position data showed strong concentrations of positions by individual players in both the futures market and the physical nickel market that supports trading.

The LME he slept behind the wheel, “said Andrew Mitchell, director of nickel research at Wood Mackenzie, a consulting firm.” We got to a point where things were happening that weren’t normal market forces. “

Traders on the floor of the London Metal Exchange in London.


Simon Dawson / REUTERS

Other factors exacerbated the crisis. The London market did not have guard rails on many other exchanges, such as circuit breakers or limits on daily price changes. ECM Group‘S

The Comex exchange, on which copper and gold are traded, stops trading if prices move 10% within an hour.

The exchange was also slow to act and let trading continue on March 7 despite a 66% rise in nickel prices, a sign that the market had become messy.

The LME dates back to the sawdust circles around which merchants bought and sold metals in the early 1800s as the industrial revolution took hold. An open ring of protest, formed by a tight circle of red layers, remains a fixture of the exchange where traders trade metals using shouts and gestures.

As the demand for metals has increased with the size of the Chinese economy this century, the exchange has taken on a new prominence and a bidding war has emerged to own it. Hong Kong Exchanges and Clearing Ltd.

beat CME, Intercontinental Exchange Inc..

and a division of the New York Stock Exchange to buy the LME in 2012 for £ 1.4 billion, equivalent to $ 2.2 billion at the time. He paid a huge premium to the value of LME’s shares.

Mr. Chamberlain advised Hong Kong Exchanges on the deal as a UBS group AG

banker before moving into the LME. He dominated the freewheeling culture of the LME with a ban on drinking at work in the ring of open protests. He tried to eliminate travel to strip clubs during the LME’s annual conference.

One area that hasn’t changed has been forcing brokers to agree on clearer reports on over-the-counter transactions. Brokers who are members of the exchange have rejected a proposal for greater disclosure, according to LME documents. They complained about the complexity and cost of such relationships.

Matthew Chamberlain, chief executive of the London Metal Exchange.


Anthony Kwan / Bloomberg News

Tsingshan meanwhile was building a huge nickel trade, which would have benefited if prices dropped. With foundries in China and Indonesia, Tsingshan has had the ability to flood the supply market.

In total, the company sold around 190,000 tons of nickel on the stock exchange and through private deals with banks and brokers, traders and analysts estimate. At the closing price on March 7, it was worth $ 9.1 billion. Most of these positions were entered into bilaterally with different banks, not LME forward contracts.

Traders are divided over whether Tsingshan was simply hedging the large amount of nickel he produces, or whether he was making what amounted to a massive and risky bet on price direction.

Tsingshan spokespersons could not be reached for comment.

Mr. Chamberlain said the LME will move to impose stricter requirements in the wake of the nickel fiasco. “I think now the LME will have to step in and say these things have to happen,” he said.

The exchange has already tightened its nickel information sharing requirements and imposed limits on daily moves for the first time. An interim deal reached by banks with Tsingshan this week gave the exchange the confidence it could reopen the market.

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Nickel was traded on Wednesday, Thursday and Friday, dropping the maximum allowable amount under the new limits, removing some of the pressure on Tsingshan’s operations.

The saga could open the doors to rivals CME and Shanghai Futures Exchange. CME is conducting a review of what led to the London market explosion in order to potentially create a nickel contract, said one person familiar with the matter, adding that any launch is a long way off. CME declined to comment.

“We are very aware that the events of the past week have damaged our reputation,” said Chamberlain, who will leave the LME this year to join a cryptocurrency firm. “We accept that we have a lot of work to do to make sure we stay that chosen place.”

—Jing Yang and Rebecca Feng contributed to this article

Write Joe Wallace at

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