turbulence in the commodity market
Why is the nickel price going crazy?
By Jaris Lanzendorfer
3/13/2022 3:53 p.m
The Ukraine war creates a state of emergency on the commodity market. After a price explosion of 400 percent in a few days, the metal exchange LME stops trading in nickel indefinitely. Concerns about supply bottlenecks are just one reason for this crazy price rally.
These are turbulent times: Within days, the price of nickel rose from an average of $25,000 a ton to as much as $100,000 per ton before it dropped to around $50,000 – that’s a price increase of up to 400 percent. The London metal exchange LME therefore suspended trading in nickel on Tuesday and subsequently canceled all transactions for the day. The LME wrote in a statement that it was an “unprecedented” price increase.
Why is the nickel price going crazy?
Russia’s ongoing war of aggression in Ukraine and the associated sanctions are having an impact on the nickel price: According to the Federal Institute for Geosciences and Natural Resources, Russia is the world’s largest exporter of nickel after Indonesia and the Philippines. The company that exports the most in the world is the Russian company Nornickel. Bottlenecks already existed before the Russian invasion, and at the beginning of the week there were numerous speculations about a failure of Russian deliveries.
What is nickel used for?
Nickel is mainly used in the production of stainless steels and nickel alloys. These include stainless steel, coins or even electric guitar strings. A small part is also the production of batteries for electric cars. According to the United States Geological Survey, around 2.4 million tons of nickel were mined in 2018.
How does the nickel market work?
Nickel producers often go short (betting that prices will fall) so that they can hedge against future declines in the value of their physical stocks. In the end, it’s a zero-sum game: keep price movements in physical inventory and short positions in check.
The metals markets are currently fragile, however, because many inventories have been bought up due to speculation about a supply failure for many metals. There is more material being traded in the markets than is physically in stock, which is why there can be high margins with current inventories.
A margin is a type of deposit that is necessary for security. If you cannot call, you have to give up the short position, also called “short squeeze”. This, in turn, puts even more strain on the market.
Why did the LME close trading?
The London nickel market was in a massive short squeeze. The Chinese nickel giant Tsingshan, which has large production facilities in Indonesia and China, was particularly hard hit. The holding holds a massive 100,000 tonne short position in the LME nickel market.
Because the price keeps rising in such a situation, more and more speculators like Tsingshan have been under pressure. These bought nickel to balance the positions and correct their entry price upwards. This in turn led to an even higher price. The trading system on the LME got out of control, the exchange pulled the emergency brake and suspended trading in nickel.
Has there ever been a similar situation?
Such a price explosion happened on the LME last October. However, it was the copper price there that shot up. A trader bought the physical deposit short at the time, driving many short positions and the copper price up.
What are the effects of the price explosion?
The e-car industry in particular is suffering from the rising nickel prices. The British market research company Globaldata has calculated that Germany could therefore miss its target of 15 million electric cars by 2030. But Commerzbank has given the all-clear: Your analyst Daniel Briesemann told the dpa that he expects trading to calm down as soon as the short squeeze has passed. “Then the price of nickel should also be significantly lower again.”
What’s next?
It was not clear until Friday when trading in nickel would start again. Tshingshang has secured a package of loans to cover margin calls. This is intended to compensate for the current liquidity bottleneck. Tshinghan boss Xiang Guangda said a possible exit from betting against nickel is under consideration. This would mean a complete change of strategy, after all, shorting has been extremely common in the nickel business so far. Even at a price of around $50,000 per ton, the company is threatened with billions in losses.