Published by Wanda Rich
Posted on March 8, 2022
By Eric Onstad
LONDON (Reuters) – The London Metal Exchange (LME) in an unprecedented move halted nickel trading and cancelled all trades on Tuesday as a race to cover short positions saw prices double in just hours to record highs above $100,000 per tonne.
The trading shutdown after Western sanctions threatened supply from major producer Russia is the biggest crisis to hit the 145-year-old exchange in decades.
In the 1990s a rogue Sumitomo trader tried to corner the copper market and tin trading was stopped for five years in the 1980s.
The move underscores the market panic created by Russia’s invasion of Ukraine with buyers scrambling for the metal crucial for making stainless steel and electric vehicle batteries.
“The current events are unprecedented,” the LME said in a notice to members. “The suspension of the nickel market has created a number of issues for market participants which need to be addressed.”
One reason the LME took action is because some position holders have been struggling to pay margin calls, traders said.
The LME raised margin requirements for nickel contracts by 12.5% to $2,250 a tonne, effective from the close of business on Tuesday, and suspended trading of nickel on all venues for at least the rest of the day.
“For the LME to stop trading for an entire day, that doesn’t help its long-term relevance,” said Colin Hamilton, managing director of commodities research at BMO Capital Markets. “This is meant to be a market of last resort and people can’t get inventories to deliver against positions.”
The LME announced that all trades will be voided from midnight until 8:15 a.m. on Tuesday when trading stopped and added that it was considering a closure of several days.
In another rare move, it also deferred physical delivery of maturing contracts.
“The LME will actively plan for the reopening of the nickel market, and will announce the mechanics of this to the market as soon as possible.”
Three-month nickel on the LME more than doubled to $101,365 a tonne before the LME halted trade on its electronic systems and in the open outcry ring.
Nickel had pared gains to $80,000 a tonne when trading was halted, up 66% on the day and a staggering 177% since Monday.
MARKET BATTLE
The explosive gains, which have seen prices quadruple over the past week, resulted from two major players facing off, said Malcolm Freeman of Kingdom Futures.
One entity has control of between 50% and 80% of LME inventories, LME data shows.
“There’s a very big short and a very big long who’ve been sparring. And because of their sparring, it’s brutalised so many other shorts,” said Freeman.
Some small industrial users have been caught in the crossfire, having taken positions to get physical delivery but then hit with margins calls costing millions of dollars, he added.
On Monday, the exchange said members with short positions, unable to deliver or to borrow metal at a backwardation of no more than 1% of the previous day’s cash price may have their delivery deferred.
The uncertainty caused by Russia’s invasion and resulting sanctions has added to an already bullish nickel market due to low inventories, which have halved on the LME since October.
Russia not only supplies about 10% of the world’s nickel but Russia’s Nornickel is the world’s biggest supplier of battery- grade nickel at 15%-20% of global supply, said JPMorgan analyst Dominic O’Kane.
The LME is owned by Hong Kong Exchanges and Clearing Ltd.
(Additional reporting by Eileen Soreng in Bengaluru; editing by Louise Heavens and Jason Neely)
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