LME nickel volatility continues
2022.12.12 02:07
LME nickel volatility continues
Budrigannews.com – The nickel industry didn’t need to be reminded of how dysfunctional the London Metal Exchange’s (LME) nickel contract has become because it still had fresh memories of the March meltdown of the nickel market; despite this, it received one last month.
The nickel contract is still in violation, months after turbulence brought attention to oversight deficiencies at the LME. There is no global reference price for the nickel industry as a result of falling volumes and liquidity, which has far-reaching consequences.
Nickel, which is a key component of stainless steel and is used in the cathode of batteries in electric vehicles, is now a key material in the industry.
This year’s high LME nickel prices were caused by low stocks and declining liquidity, driving up costs for industrial users already struggling with rising inflation.
Some nickel producers have taken advantage of the lack of a reliable benchmark by attempting to return to a system that was in place before there was a nickel contract when they imposed prices on consumers, according to industry sources. Global trade in metals is typically priced on the basis of LME contracts.
Nickel futures are available on the Shanghai Futures Exchange, but the contract cannot be used as a global benchmark because the Chinese government only allows domestic businesses to trade it.
In the wake of the chaos in March, numerous investors, traders, consumers, and producers have abandoned LME nickel.
On March 8, disorderly trade culminated in worries about supplies from major producer Russia following its invasion of Ukraine and the cutting of large short positions, or bets on lower nickel prices. Prices quickly doubled to more than $100,000 per tonne.
On that day, the exchange suspended the market for the first time since 1988 and canceled all nickel trades, for which it faces legal action.
After year-over-year losses of 40%, 51%, and 42% in September, August, and July, respectively, average daily nickel volumes have since plummeted to 196,868 tonnes in October.
Excessive price movements have become more frequent as liquidity has decreased.
Due to China’s net import of nickel and the ShFE nickel price’s consideration of logistical costs and local taxes, LME nickel typically trades at a discount to the ShFE contract.
However, sources claimed that the fact that the LME’s nickel contract traded at a premium to ShFE for the first time since March was a sign of a dysfunctional market due to the fact that it did not reflect fundamentals.
On November 14, the move was inflated by some participants cutting short positions, which fueled optimism and expectations of stronger industrial metals demand in China’s top consumer.
Unusually, on November 14 and 15, one buyer consistently bid nearly $1,000 more for the metal than the rest of the market.
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Nickel trading experienced a meteoric rise as a result of this and contract maturity, which was only halted in March by the exchange’s daily price limits of 15%.
The LME claims that the market was calmed by its swift action in November.
In response to a request for clarification, the exchange stated, “The LME has the power to investigate unusual trading activity and to take disciplinary action as appropriate.”
“The LME’s daily price limits… functioned as intended and reduced the move’s impact.” The LME spotted and inquired about specific underlying order and trade activity right away. The price returned to normal shortly after the LME objected to this behavior.”
On November 14, there were some offers to sell nickel at prices above the daily price limit of 15%, which increased the volatility.
A source at a nickel-consuming company stated, “It’s surprising they (LME) haven’t found a way to stop reckless behavior that creates an existential threat to its nickel contract, one of the most important contracts this decade.”
Nickel demand from the battery industry, according to Benchmark Mineral Intelligence (BMI), will reach 4.8 million tonnes by 2030, representing 30% of the total, up from 14% of three million tonnes this year. The majority of that growth will come from batteries for electric vehicles.
Although the amount of nickel that can be delivered in response to the LME contract is only 20% of global supplies, the LME benchmark is still used in many contracts between producers and consumers.
Guy Wolf, head of market analytics at commodity broker Marex, stated, “The nickel contract will survive because there is no alternative, but it could take some time for a full recovery.”
Nickel benchmark is now $30,000 per tonne, a 50% increase from December 2017.
Industry sources say the best way to reestablish LME nickel’s standing as a worldwide benchmark is the arrival of volumes and liquidity, yet when and how that happens is not yet clear.
