A Chinese Nickel Market Mystery

Traders, brokers and clerks on the trading floor of the open outcry pit at the London Metal Exchange Ltd. (LME) in London, Feb. 28.


Photo:

Chris J. Ratcliffe / Bloomberg News

Market ructions amid war aren’t unusual. But the London Metal Exchange’s retroactive cancellation of nickel trades this month appears to be unprecedented. One question is whether the Hong Kong-owned exchange intervened to rescue a Chinese nickel tycoon.

Nickel prices were climbing for the better part of a year prior to Russia’s invasion of Ukraine, amid rising demand for electric-vehicle batteries and stainless steel. Russia supplies about 20% of the world’s high-grade nickel, and worries about sanctions sent prices higher. This threatened the Tsingshan Holding Group, which had built a large short position.

Tsingshan is one of the world’s largest nickel and stainless steel producers. It is also a cornerstone of China’s Belt and Road Initiative, which seeks closer ties with poorer countries by developing their natural resources.

Tsingshan Chairman Xiang Guangda also has a history of moving markets. Nickel prices dropped last year after he announced that Tsingshan had developed a game-changing technology that would enable cheaper intermediate grade nickel to be used for batteries. This could expand the nickel supply available for batteries and push down prices.

Many investors suspect that Mr. Xiang had built a short position with plans to flood the market with his nickel. But then as prices climbed amid Russia’s invasion, his brokers struggled to meet margin calls, and bullish investors took advantage. Nickel prices surged 250% amid the short squeeze before the LME suspended trading and canceled trades.

The Journal reported that Tsingshan would have owed $ 15 billion if not for LME’s intervention. Tsingshan could cover its short position by delivering high-quality nickel to the exchange, but this would probably require the Chinese government to swap its high-grade reserves for Tsingshan’s low-grade nickel.

By canceling trades, LME effectively rescued Tsingshan and Beijing. Exchanges sometimes halt trading when prices are volatile, but they do not invalidate contracts. Some traders are speculating that LME’s owners at the Hong Kong Exchanges and Clearing Ltd.

felt pressure from Beijing, even if not explicitly, to do so.

LME has blamed a lack of visibility in over-the-counter agreements and described the market moves as unprecedented. LME CEO Matthew Chamberlain denies Chinese pressure and said this week that the exchange intervened “because of the size and systemic impact of the client and we would have done that whatever their nationality.”

This explanation is hard to credit. Tsingshan may have lost billions of dollars, but it would not have taken down the nickel market. There were some worries when the Hong Kong exchange bought LME in 2012 that it might be vulnerable to China’s political influence. LME has sought Chinese approval to open a metals warehouse in the mainland.

Nickel trading resumed on the LME last week with circuit-breakers to prevent large price swings, but technical glitches abounded. The fiasco has caused some traders to exit positions, reducing market liquidity, and it has damaged the LME’s reputation. AQR Capital Management founder Cliff Asness tweeted: “I’ve been doing this for a wee bit of time. This is one of the worst things I’ve ever seen. ”

Markets can not function efficiently without investor confidence. If LME does not restore canceled trades, UK regulators should investigate what happened and why.

Journal Editorial Report: Democrats face the severe political challenge of high energy costs. Image: Michael Nagle / Bloomberg News

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Appeared in the March 23, 2022, print edition.

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