The unlikely cast behind nickel’s big squeeze

A rundown of the key players, from VW to JPMorgan.
Traders, brokers and clerks on the trading floor of the open outcry pit at the London Metal Exchange in London, U.K., on Monday, Feb. 28, 2022. Image: Chris J. Ratcliffe/Bloomberg

Furious investors and traders. Evaporating liquidity. A market that many veterans simply describe as “broken.” It’s been three weeks since nickel was suspended on the London Metal Exchange after a 250% price spike and while trading has resumed, the market remains all but paralyzed.

As the crisis plays out, accusations are already beginning to fly. Investors are preparing lawsuits; the LME and its regulator, the Financial Conduct Authority, are likely to run investigations. It’s far from clear that any party broke any rules — it may be that the rules just weren’t fit for purpose.

Getting to the bottom of who did what, when, and why, could take months or years. In the meantime, here’s a rundown of the key players in the great nickel short squeeze.

The shorts: big shot (and friends)
At the centre of the crisis is entrepreneur Xiang Guangda, whose Tsingshan Holding Group Co. is the world’s biggest nickel and stainless steel company. The tycoon known as “Big Shot” in Chinese commodity circles had built a giant short position in LME nickel in a bet that increasing supply from his company would drive down prices. When nickel rose rapidly after Russia’s invasion of Ukraine, Tsingshan struggled to pay its margin calls, setting the stage for a short squeeze.

A Tsingshan office building in Shanghai, China Photographer: Qilai Shen/Bloomberg

There’s nothing unusual or inappropriate about miners using derivatives contracts to lock in the price of their future production. But Xiang’s position was unusually large, equivalent at its peak to roughly one in eight of all the contracts outstanding in the LME nickel contract.

And Tsingshan has a history of aggressive trading. In 2019, it was on the other side of a short squeeze: it withdrew large amounts of nickel inventories from LME warehouses, causing prices to leap more than 50% in a few months. The LME opened a review into trading activity, but took no further action.

This time, Xiang also had company — Bloomberg has reported that several other Chinese firms amassed short positions as his allies. And Tsingshan sold its nickel products in a way that meant traders and buyers would have their own large short positions on the LME, magnifying the pain across the market when prices spiked.

The longs: VW, Glencore, hedge funds
While Xiang stands out as the big short, there’s no single trader or investor on the other end that gets the credit (or blame) for driving prices higher. But several market participants held sizable long positions that contributed to the rally.

Volkswagen AG has one of the largest long positions in the market, at the equivalent of over 100,000 tons, according to a person familiar with the matter. The position is spread over nine years of forward contracts as a hedge against raw-material costs — nickel is a key ingredient in electric-vehicle batteries.

Trader and miner Glencore Plc is another large long-position holder and has at times controlled more than half of the available inventories in LME warehouses. The company’s overall position in LME nickel is short —  it uses the exchange to protect against price risk on the metal it ships around the world. But it bought LME stocks to deliver the nickel from the exchange warehouses to its customers after a surge in freight costs made shipping metal from Asia to Europe and the U.S. much more expensive, according to a person familiar with the matter.

Then there are the hedge funds, drawn to nickel as a bet on the EV revolution and more recently on worries about interruptions to Russian supplies. Collectively, investment funds lifted their bullish bets on nickel to the highest on record on Feb. 18, the week before Russia’s invasion of Ukraine. Their net position was equivalent to about 250,000 tons of nickel, although most of the increase came before this year.

The banks: JPMorgan and the rest
In the run up to the squeeze, the scale of Xiang’s exposure was obscured by the fact that he spread his nickel short position across about 10 banks and brokers. What’s more, while he held about 30,000 tons of his short position directly on the LME, that was less than a fifth of its total size of over 150,000 tons. The vast majority was held in bilateral derivative deals, known as “over-the-counter” positions, with banks led by JPMorgan Chase & Co., and including BNP Paribas SA, Standard Chartered Plc and United Overseas Bank Ltd.

JPMorgan’s leading role means that the U.S. lender arguably had better insight into Tsingshan’s market-roiling position than the LME did: about 50,000 tons of the short position was held via OTC bets with JPMorgan, Bloomberg has reported.

The bank has had a close relationship with Tsingshan for years. When Tsingshan’s trading squeezed the LME nickel market in 2019, JPMorgan was among the banks that helped finance the Chinese company’s nickel purchases. It made about $100 million trading nickel that year — a blowout performance for what is usually a niche trading book.

The London Metal Exchange
The 145-year-old home of global metals trading has been heavily criticized by investors for its response to the crisis. First it allowed the market to reopen even after a 66% price surge on March 7 led one of Tsingshan’s brokers to miss a margin call payment (the LME gave it more time to pay). Then — after seven hours of increasingly wild trading — it suspended nickel and retroactively canceled all the transactions that took place on the morning of March 8 as prices doubled.

The LME has said that if it had allowed the trades to stand, several brokerages central to the metals ecosystem would have failed. Many in the industry believe the exchange made the right call. Nonetheless, the effect of the decision was a bailout of Tsingshan and its banks to the tune of several billion dollars.

Traders on the trading floor of the open outcry pit at the London Metal Exchange Ltd. (LME) in London, UK. Image: Bloomberg

But it is the LME’s earlier lack of action in allowing trading to restart unfettered on March 8 that has elicited the most unanimous disapproval. What’s more, the LME wasn’t aware of the scale and potentially systemic nature of Tsingshan’s position until the day it blew up. Yet the short squeeze in nickel had been the talk of the market for several weeks already: Bloomberg reported in mid-February that Xiang was the focus of a squeeze on the LME.

Since reopening two weeks ago, the nickel market has yet to reach an equilibrium. Prices spent several consecutive days locked at the maximum daily limits and, while trading has now resumed to some degree, a dramatic collapse in volumes means the market remains effectively paralyzed.

The regulators
The FCA, the LME’s regulator, tends to leave most of the big decisions and the policing of market abuse to the exchange. Some commentators have called for limits to prevent any single trader playing an outsized role in the market, although in reality such restrictions already exist — they’re just extremely permissive. The allowance for a single trader’s position in LME nickel contracts is well over twice the size of Tsingshan’s position. In fact, it’s more nickel than has ever been held in LME warehouses.

The last major enforcement action taken by the FCA (or its predecessors) against a company over its activities on the LME was more than two decades ago, in the wake of the Sumitomo copper scandal.

“Given our role in supervising the LME, we have been, and will continue to be, taking a very close interest in how it is managing and responding to the issues,” the FCA said in a statement Tuesday.

Regulators have publicly admitted they’re in the dark about commodity markets. When the Bank of England’s Financial Policy Committee met earlier in March, it noted that it was important to assess potential contagion between commodity market volatility and the financial system more broadly. But, according to a published summary of the discussion, “the assessment of risks was made more difficult by the relative opacity of commodity derivatives markets.”

© 2022 Bloomberg L.P.

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