JPMorgan Chase & Co. is reviewing its business with some commodity clients after last month’s nickel short squeeze, a move that threatens to drain more liquidity out of the sector.
Senior management at JPMorgan has asked teams around the world to conduct fresh due diligence on some existing clients, including metals traders and oil refiners, according to people familiar with the situation. Risk assessments are also being conducted on certain financing functions, said the people, who asked not to be identified as the information is private.
The U.S. bank is one of the largest players in global commodity markets and the biggest in metals by far. It was also a central participant in the nickel price spike that rocked the London Metal Exchange last month, as the biggest counterparty of Tsingshan Holding Group Co., the world’s largest producer of the metal that’s at the center of the squeeze.
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JPMorgan was already monitoring and adjusting its commodities exposure amid heightened market volatility before the nickel short squeeze, according to another person familiar with the bank’s position. Since the nickel price spike in early March, the bank has been conducting a deeper review, the person said.
“Consistent with prudent risk management, we have been reviewing risks in light of the significant market events throughout this year and we will continue to do so across all markets, but we remain committed to our commodities franchise,” JPMorgan said in a statement.
Any pullback by the bank would come at a particularly difficult time for commodity markets, already suffering a dramatic decline in liquidity as high prices and wild swings force traders to the sidelines.
While the review is encompassing clients across JPMorgan’s commodities business, it is focused on base metals and businesses related to trading on the London Metal Exchange, the people said. One issue the bank is considering is how to stress test its business for unprecedented shocks like the one that occurred in nickel, one person said.
It’s not clear what the outcome of the review will be, the people said, but it’s possible that it could result in JPMorgan scaling back activity in commodities. The lender has already been reducing its exposure in the nickel market, the people said. It has also been requiring additional management approval for new financing deals in metals.
The nickel short squeeze rocked the commodity sector, with the LME saying it had created a “systemic risk” to the market. In response, some banks temporarily paused commodity financing in Asia early last month, according to physical traders based in Singapore and China who would typically borrow from the affected banks. Some of the traders still can’t access funding from those banks, which include JPMorgan, and have been told it is because the lenders are reviewing their commodity business, they said.
Deals that have been affected include repurchase agreements with banks, in which traders use their inventories to raise financing.
About 50,000 tons of Tsingshan’s total nickel short position of over 150,000 tons was held through an over-the-counter position with JPMorgan, Bloomberg reported last month.
The Chinese company struggled to pay its margin calls after nickel spiked as much as 250% in a little over 24 hours, but it got a reprieve after trading was suspended for a week, the transactions at the highest prices were canceled, and its banks — led by JPMorgan — agreed not to make further margin calls.
Based on the 50,000 ton figure, Tsingshan would have owed JPMorgan about $1 billion in margin on the day before the nickel market was halted. If the nickel price had been allowed to continue rising, the bank’s exposure to Tsingshan could have risen by billions of dollars more.
And while the nickel market has stabilized somewhat, Tsingshan’s short position has not yet been resolved. The company covered some of its short position by buying nickel contracts but it still has a large bet on falling prices, Bloomberg reported earlier.
Nickel rose as much as 1.8% on the LME on Tuesday to $33,850 a ton. Prices have steadied in the weeks since the market reopened, but volumes on the exchange have dropped sharply, suggesting that many investors and traders are remaining on the sidelines for now.
(By Alfred Cang and Jack Farchy, with assistance from Winnie Zhu and Hannah Levitt)