Nickel prices plunged to the maximum allowed when the market reopened in a messy sequence of false starts, with a glitch that disrupted electronic trading for several hours and only a handful of contracts that changed hands.
For the London Metal Exchange, already facing the wrath of investors over its decision to cancel $ 3.9 billion in operations last week, it was another embarrassing setback. The nickel turbulence plunged the metals industry into chaos after a huge short squeeze centered on Chinese tycoon Xiang Guangda sent the price up an unprecedented 250% in just over 24 hours last week.
In private, exhausted traders and brokers – many of whom have been working around the clock for several weeks – have expressed their exasperation at the trade.
A metal portfolio manager at a macro hedge fund said he spoke to half a dozen friends from other funds on Wednesday, all of whom had promised never to trade nickel on the LME again. To make matters worse, many were stuck holding long positions that they could not redeem because the market was barely trading.
The nickel market had been closed since 8 March. On Wednesday morning, trading resumed briefly at 8:00 am and the futures immediately dropped above the daily limit before the market was suspended again. The exchange said it stopped electronic trading to investigate a glitch that allowed trades below the lower price limit and would cancel a “small number” of trades. A phone-based trading system and the LME opening threshold were not affected, with prices even in the “Ring” dropping by the 5% limit.
At 2pm, the stock exchange resumed e-commerce. But with no one willing to buy at the cut-off price of $ 45,590 per ton, it took more than an hour to trade.
The nickel crisis is threatening to engulf the LME – already some angry investors have said they will abandon trading on the market, which is owned by Hong Kong Exchanges and Clearing Ltd. The effects will be felt far beyond the world of metal traders. . Nickel is a key ingredient in both stainless steel and electric car batteries, and the LME plays a crucial role as the primary benchmark for pricing the various forms of metal used by manufacturers.
“Liquidity will continue to decline. Anyone who thinks of intervening to provide liquidity to the market will certainly think twice, “said Keith Wildie, head of trading at Romco Metals.” I don’t think this is a market problem, I think it is an existential problem for the LME. “
Prices remained limited to the close and the LME subsequently announced that it would raise the price range to 8% per cent for Thursday’s trading in an effort to “further help the market discover the true market price”.
With the squeeze that has been gripping the nickel market for more than a week, the drop in prices suggests that the tension could ease. LME waited to announce the restart until Xiang’s Tsingshan Group Holding Co. reached an agreement with its banks to prevent margin calls. The suspension deal reduced the risk of a repeat of last week’s chaos as rising prices left Tsingshan struggling to pay for margin calls on his large nickel short position.
“It kind of went as planned as we all expected it to fall, but it was just a question of how fast,” said Colin Hamilton, chief executive officer for commodities research at BMO Capital Markets.
And while the benchmark’s three-month futures were stuck at the limit, trading in other contracts indicated a dramatic reversal of tight supply conditions seen in the LME market prior to closing.
The April delivery contracts traded up to $ 60 dollars a ton less than the May contracts, entering a discount for the first time since October. They had traded at high premiums prior to closing, in a condition known as backwardation which signals a shortage in spot offering. Trading volumes on the April-May spread reached more than 1,700 lots, compared to just 249 lots traded on the reference contract three months before the lower price limit was reached.
Additionally, the LME’s electronic order book showed a huge sell order – equivalent to approximately 50,000 tons of nickel – at the cutoff price of $ 45,590 a ton, suggesting that the market could drop further once allowed.
Ultimately, the immediate drop early Wednesday is illustrative of the market sentiment, Marex’s Alastair Munro said in a statement.
“Longs just wants to get out of a market that has become and likely will remain dysfunctional,” he said.