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Why nickel futures are trading like meme stocks

Trading glitches plagued the nickel futures market in London Friday, with prices settling down at the exchange-imposed limit for a third straight day. As more details emerge from the disorderly market failure that shuttered trading in nickel for over a week — only to reopen in chaos — industry insiders are crying foul.

The current circus in nickel captured popular attention on March 7 when a giant bearish bet on nickel prices blew up in a spectacular short squeeze that would have rivaled GameStop (GME) or AMC Entertainment (AMC) in early 2021. Nickel futures on the London Metals Exchange (LME) settled at $36,915 per ton Friday — down 63% from the record $100,000 per ton hit briefly during the squeeze.

Late Friday afternoon, Goldman Sachs reportedly offered to buy or sell nickel in two-way off-exchange transactions, with a bid of $25,000 and an offer of $37,000. This indicates another potential drop of 32% from Friday’s settlement, which is far lower than Monday’s maximum price limit drop of 15%, which would equal $33,673 to the downside.

But the story behind the greatest nickel squeeze of all time began months ago, according to Michael Widmer, senior metals strategist at Bank of America Global Research, noting that the market was already tight in October 2021.

“[A]s we moved into this year, things got already quite volatile, and it turned out that there was a large short position holder [who] found it hard in a way to cover those short positions,” said Widmer, adding, “I think [the LME] could have gotten away with it if it hadn’t been for the war in Ukraine, effectively, because Russia is a big nickel producer.”

The $8 billion nickel short

The man behind what is likely the largest ever short bet on nickel is Xiang Guangda, the chairman of Tsingshan Holding, and colloquially known as “Big Shot.” Xiang built the metal-making empire from scratch, focusing on the opportunity he saw to secure for China a stable nickel supply — necessary for steel and electric batteries.

Casual observers may question why Xiang would bet that nickel prices would drop. While he could have been hedging his company’s own supply, friends and associates of his have noted his predilection for “punting” — or betting. Back-of-the-envelop estimates of Xiang’s trading losses peg them around $8 billion.

All of this was taking place amid an explosion of commodities prices roughly two weeks ago that sent crude oil futures (CL=F, BZ=F) to 14-year highs and wheat futures (W=F) to a record. Nickel outperformed them all — skyrocketing 250% in hours.

The perfect storm was also exacerbated by the fact that although Xiang’s company produces physical nickel, the grade isn’t high enough to deliver to the LME. In other words, he couldn’t offset his large short bet by pledging the underlying commodity to the exchange. He would need another way — especially as he didn’t want to give up his short position.

Widner believes that shutting down the exchange was the only option given the circumstances, noting the difficulties in offsetting the position. “You had in essence — very simplistically put — a lot of demand for that offsetting long, but no one wanted to give [Xiang] that long,” he said. The thinking would be, he continues, to shut down trading in nickel for a time and try to “reopen in a more settled environment.”

Market shut down, trades busted

Several large players in the metals market — including JPMorgan — were facing billion-dollar losses each. During the week the LME was closed, they negotiated with Xiang to allow him to keep his position. However, many traders were still up in arms over the $3.9 billion in nickel trades canceled by the LME in the wee hours of the Tuesday following the price spike. That was the day trading would eventually be halted.

Busting trades is bad for business, as it threatens market integrity and potentially scares away market participants. Goldman Sachs and Tower Research Capital were among those who bet correctly on the price of nickel, that it would go up.

The LME tore up their winning contracts that would have generated large profits. Those “profits” instead went to benefit Xiang, his counterparties, and others caught the wrong way. While the LME reserves the right to shut down markets under emergency circumstances, industry insiders say lawsuits are likely.

Complicating the situation is the fact that the LME is owned by Hong Kong Exchanges and Clearing (HKEX).

The current turmoil in the [nickel] market is self-inflicted,” said Mark Thompson, executive vice chairman at Tungsten West Ltd., as he fired off in an impassioned tweet storm. He added that HKEX “[does] not fundamentally understand the metals markets and the role that the member banks and brokers play as credit and liquidity providers.”

Thompson believes the entire episode was preventable and should not have happened. He argues that the LME and HKEX should not have allowed Xiang to build such a large short position, particularly “in the most volatile and one of the least liquid metals.”

He adds that it was a “dereliction of responsibility” not to anticipate the “risk to market orderliness.”

Not like trading meme stocks

During the saga that brought WallStreetBets into the popular lexicon, some brokers like Robinhood Securities (HOOD) suffered major outages — angering customers. By way of comparison, the wild moves in meme stocks last year also triggered temporary circuit breakers that shut down trading for minutes at a time so traders could regroup. But trading in GameStop and its cohorts continued unabated in the days to come.

Not so at the LME. Futures exchanges operate differently than stocks, as the end goal is to provide a place where commercial players — both the end-users and end-suppliers — can meet to hedge their future commodity needs. For instance, miners can sell their metals for future delivery while buyers who need the physical metal may agree to take future delivery. The other traders are speculators, providing liquidity to the market.

No other futures exchange is likely to displace metals trading at the LME any time soon, as it operates a vast warehouse that would be difficult to get off the ground. Shanghai nickel futures in China are largely closed to foreigners. In the U.S., the Chicago Mercantile Exchange offers aluminum, zinc and copper futures, but only the latter has any real trading volume.

Nickel traders are stuck with the disfunction at the LME for now.

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