Banks to Keep Talking on Nickel Trading Losses, Tsingshan Says

Tsingshan Holding Group said large banks agreed to continue discussing a potential settlement with the Chinese metals producer, whose wrong-way bets led to a dayslong suspension of nickel trading on the London Metal Exchange.

JPMorgan Chase JPM 0.99%

& Co. and other banks are seeking billions of dollars that Tsingshan owes them for trades the banks made on its behalf on LME. The trades amounted to a big wager against the price of nickel and led to large losses at Tsingshan when prices for the metal, used in stainless steel and batteries, surged in the wake of Russia’s invasion of Ukraine. The price increases are now rippling through the global financial system and the world economy.

As losses on the trades mounted, banks and brokers that acted as intermediaries between Tsingshan and the LME faced big cash demands from the exchange. Some sought to unwind the trades by buying back nickel contracts, fueling an unprecedented run-up in prices last Tuesday and prompting the LME to close the market. The LME said trading will resume Wednesday morning.

During the so-called standstill agreement reached Monday, Tsingshan said in a statement, the banks will continue talks on a secured lending package that would enable the company to pay the upfront cash it owes banks and brokers, known as margin. Tsingshan said the banks had agreed not to close out positions they hold against the company. It said they also had agreed not to make further margin calls in relation to existing trades. JPMorgan declined to comment.

The deal provides a mechanism for Tsingshan to reduce its position in nickel as market conditions normalize, the statement said. The statement did not provide details on the duration of the standstill, the size of the credit facility under discussion or the assets against which it might be secured.

The unprecedented surge in nickel prices on the LME sparked by Tsingshan’s ill-fated trade first rippled through the financial system and is now affecting the real economy. In particular, it has disrupted the operations of producers and manufacturers in China that make nickel-related products, showing how the trading fiasco is reverberating across the supply chain for the widely used material.

Over the past week, more than half a dozen Chinese companies — most of which produce and supply nickel compounds — sent notices to their customers and investors warning of supply hiccups, price hikes, or slowdowns in their ability to accept or meet orders.

Prices of nickel, a key ingredient used in stainless steel and electric-vehicle batteries, went through the roof last week following an epic short squeeze that centered around China’s biggest nickel and steel producer. At one point last Tuesday, prices for the three-month nickel contract reached $ 100,000 a metric ton, leading the LME to suspend trading and cancel trades that took place that day. That put the contracts’ last closing price at $ 48,078 a metric ton last Monday, nearly double its level from the prior week. The exchange has yet to say when nickel trading will resume.

The sharp increase in prices is impacting companies far and wide. In Australia, a base-metals producer said Monday that its planned $ 800 million purchase of a nickel miner could be delayed because of the huge nickel price move.

Jilin Jien Nickel Industry Co., a medium-size nickel sulfate and nickel chloride producer based in the Eastern province of Jilin, told its customers in a letter dated March 9 that it was likely to lose money due to the sudden and dramatic increase in its imported raw material costs, which are benchmarked off LME nickel prices.

“A ruthless game of capital has come to us with lightning speed,” said the privately held firm, whose website said it has the equivalent of $ 2 billion of assets and 5,000 employees. “It has brought an unprecedented survival crisis to those responsible and hardworking enterprises including us,” the company lamented, adding that “huge losses are no longer avoidable.”

It could not be determined whether Jilin Jien has a short position in nickel futures contracts. The company also told customers that it can guarantee that only about half of the amount specified in its accepted orders will be delivered.

Miracle Automation Engineering Co., a Wuxi-based automation machinery maker, told investors that if nickel prices remain high, the company may have to lift the price of its nickel products as well. Fushun Special Steel Co., a steelmaker based in Liaoning province, told customers last week that the company has decided to stop accepting new orders until prices of these metals stabilize.

Last Friday, the China Nonferrous Metals Industry Association, a trade group whose members include hundreds of state-backed and private companies, said it was highly concerned about what it called “the irrational surge” in nickel prices on the LME. The association said it believes that nickel prices have seriously deviated from fundamentals and have also caused serious damage to related industries and companies in the global nickel supply chain.

A spokesperson for the group, who was quoted in its own industry publication, also tried to comfort those Chinese companies that have been forced to reduce production and stopped taking new orders. The spokesperson said that when the prices of some nonferrous metals including copper and aluminum skyrocketed last year, the Chinese government distributed these metals to targeted companies, which helped resolve their problems.

A Shanghai office of Chinese metals giant Tsingshan Holding Group, which had a massive short position in nickel futures.


Photo:

Qilai Shen / Bloomberg News

Many Chinese nickel producers import raw nickel ore from abroad and rely on the LME prices — which are denominated in US dollars — as a benchmark for their overseas purchases, which also tend to be in dollars. Companies have also tended to use LME nickel futures for hedging purposes, industry analysts said.

Although there is also a nickel futures market on the Shanghai Futures Exchange, trading onshore is denominated in China’s currency, the yuan, and the market has been regarded by traders as smaller and less liquid than its British peer.

Nickel trading has continued in Shanghai over the past week, despite some one-day suspensions after prices moved by the maximum limits allowed by the exchange. The most active nickel contract hit a high equivalent to $ 42,225 a metric ton last Wednesday, and has since fallen back to $ 32,624.

The trading fiasco has hurt nickel producers who have been using the LME as a place for genuine hedging purposes, said Michael Lion, president of Everwell Resources Ltd. and a metals industry veteran.

“This is a completely, artificially created crisis,” Mr. Lion said. He added that if producers and true hedgers are no longer able to carry out activities on the LME, the primary core function of the exchange as a risk-management tool of the physical global metals trade would be destroyed.

Commodity prices are hot right now. But the prices investors are paying in the open market for commodities like coffee, copper or corn can have little to do with the price customers pay at the store. WSJ’s Dion Rabouin explains. Illustration: Adele Morgan

Write to Rebecca Feng at rebecca.feng@wsj.com and Joe Wallace at Joe.Wallace@wsj.com

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