Nickel, the devil’s metal with a history of bad behaviour

The sky in the smoke from the chimneys of Norilsk Nickel plant. (Stock Image)

(The opinions expressed here are those of the author, Andy Home, a columnist for Reuters.)

The global nickel market is in a pricing black-out.

The London Metal Exchange (LME) three-month nickel price sits in suspended animation at $48,048 per tonne, Monday’s closing price and the last trade with even a semblance of legitimacy.

Tuesday’s mayhem and the resulting decision by the LME to suspend all trading has frozen what is the core reference price for the global supply chain stretching from miners to stainless steel mills and electric vehicle battery makers.

China is also in black-out. The Shanghai Futures Exchange has suspended trading until Friday.

Today there is no global nickel trading and no price formation.

Related Article: Nickel price spike “purely financial” but Tsingshan effect could linger

It’s a truly shocking outcome but not without precedent.

When German miners first discovered nickel in the fifteenth century, they called it Kupfernickel, or “Old Nick’s Copper”, and it has had a history of devilish behaviour ever since the LME launched the contract in 1979.

The underlying cause of the repeated market disorder has never changed.

Reuters Graphic

Ghosts of crisis past

“The LME contract has been criticised as illiquid, unrepresentative, open to manipulation and volatile”.

Hard to disagree given this week’s extraordinary events but those words were written in 1992 by a former colleague, Simon Clow.

The criticism came hot on the heels of what at the time was known as the nickel crisis of 1988.

On Friday Feb. 25 of that year the LME official ring descended into chaos as one house bid up the cash price from $10,000 per tonne to $15,000 per tonne with not a single offer. The cut and thrust of open outcry came perilously close to physical fisticuffs.

By the standards of the time, the liquidity vacuum and price acceleration were just as shocking as Tuesday’s explosion to $101,365 per tonne.

Ring-trading was suspended for the first afternoon session, which at the time amounted to halting the market, while the LME board held an emergency meeting.

A daily backwardation limit of $150 per tonne was imposed as a condition for trading resuming on the second afternoon ring session. The official ring price was scrubbed on the convenient basis that it had not actually traded.

Fast forward to 2007 and the LME had another nickel crisis on its hands. The year stands out as the previous all-time nickel price high – $51,800 per tonne – but that peak coincided with a ferocious squeeze on cash positions.

The pain for short position-holders became so acute the LME had to change its lending rules, categorising several small dominant long positions as a single entity.

A generous view was that the exchange was forcing affordable liquidity across its raging time-spreads. A less generous interpretation was that it had detected collusion among key players.

Here we are again. Time-spread pain. Extreme volatility. Shorts who can’t cover. And another broken nickel market.

Stand and deliver?

The common theme running through all three crises is one of low exchange stocks and the difficulties facing even some of the largest nickel players in delivering physical metal against LME short positions.

Physically-deliverable contracts such as the LME’s are where paper price meets real-world price and wild outcomes around settlement dates are far from rare – think back to April 2020 when front-month WTI oil settled at a negative $37.63 per barrel.

Settlement stress, however, is compounded on the LME by a rolling daily prompt date structure, which can translate into daily premium pain for a short unable to deliver physical metal as an exit route.

And nickel has delivery issues which are all its own.

“Part of the problem, critics say, is linked to the structure of the contract,” Clow wrote in 1992, explaining, “only a minority of the nickel produced every year is deliverable against the LME contract (…) LME stocks represent only a small percentage of worldwide production.”

That is as true today as it was back then.

Only Class I nickel, defined as nickel with greater than 99.8% purity, is deliverable against the LME contract.

Nickel comes in multiple forms and guises – nickel pig iron, nickel matte, ferronickel, nickel sulphate – all of which need to be price-hedged on the LME but none of which can be delivered.

The Shanghai market is no different. If anything it’s more restrictive due to the limited number of registered non-Chinese brands.

Nickel is a small market by comparison with other base metals with global consumption of around 2.77 million tonnes last year, according to the International Nickel Study Group.

Less than half of that is exchange-deliverable and the ratio is shrinking all the time.

Broken pricing

Indonesia, the world’s driver of primary production growth, doesn’t produce nickel in Class I form.

Tsingshan, the Chinese company at the epicentre of the current storm, has massive nickel capacity in Indonesia but its metal is either flowing directly into its stainless steel meltshops or being converted into intermediate products for shipment to Chinese battery makers. None of it is Class 1.

Whatever the mix of price hedging and speculative overlay in the company’s positioning, the short play ultimately had no physical delivery escape path.

Others may have fallen through the same price-delivery gap. The LME’s latest positioning report shows four significant short-position holders on the main March prompt date. If those are hedges against anything other than Class I, the owners are in the same pickle.

Nickel’s deliverability issue has dogged the LME contract since launch. There was intense industry discussion in the 1990s about the disconnect between exchange and supply-chain pricing.

But finding good-delivery criteria for a highly variable product such as ferronickel, which can grade between 20% and 40% with a wide spectrum of iron content, proved impossible.

The stainless steel sector, historically the largest user of nickel, evolved a surcharge system to try and mitigate and pass through nickel’s price volatility, but at the occasional cost of generating an echo-effect in the stainless stocking cycle.

Nickel sulphate, a fast-growing process stream which is destined for battery makers but is also not exchange deliverable, opens up another potential rift in the pricing landscape.

The London Metal Exchange is facing a lot of pressure to think harder about how it manages markets such as nickel after this week’s chaos.

But the nickel market also needs to think a lot harder about how it wants to handle its pricing risk.

(Editing by Elaine Hardcastle)


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