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Opinion: Can the London Metal Exchange learn from its nickel lesson?


When prices surged to over $100,000/t, the London Metal Exchange suspended nickel trading on March 8th – a decision that caused division between miners that rely on the exchange for trading, pricing and hedging services, and fund managers, who use its futures and options to gain exposure to commodities as an asset class. The LME’s decision to cancel trades proved to be decisive for their customers, wiping out profits of smaller traders and effectively protecting bigger position holders.

The LME have argued that their actions were in pursuit of protecting the integrity of the physical markets and that if they had not suspended trading, there would have been liquidity issues to cover the margin calls. In turn, a full default would have had severe ripple effects for the Exchange, its members and industrial users around the world who rely on its benchmark prices.

Even when trading reopened a week later on March 16, it was quickly shut down again after the LME cited a technical issue that allowed a small number of trades to be executed below this lower daily price limit.

While the immediate crisis may have been averted in the short term in what was a classic short squeeze, the Exchange’s handling catalysed chaos across the markets and went against the principal of trading and free market economics. Questions are now being asked about its structure, ownership and oversight. One of the biggest questions is how the billionaire founder of China’s leading stainless-steel producer Tsingshan Holding Group was able to amass a huge wrong-way position without the LME knowing and whether the LME could have mitigated the risk sooner.

The Exchange’s regulators, the FCA and the Bank of England, will investigate the trading stop which highlighted concerns about the structure of the market and “particularly the role of transparency” and the LME will commission an independent review into the events that led to the nickel trading chaos.

The International Monetary Fund has also said the LME’s governance systems need to be strengthened and called for all exchanges to ensure the resilience of their operational system and information technology systems.

Whilst nickel trading may now have resumed in London and the buying and selling has slowly returned to normal, for the exchange, its approach will have long term consequences for its position in the metals industry.

This was a black swan event, one that made regulators sit up and markets implode. Whilst geopolitical risks and volatile commodity and energy markets play a role here, it is clear there are some longstanding systemic issues at the Exchange which aggravated the situation and drove certain trading arrangements and investment strategies.

The LME will have to instil market confidence and implement stronger risk management measures. Limits on price moves, better disclosure, more transparency about off-exchange deal making, and imposing position limits are all measures that will support the LME’s ability to handle potential crisis situations in the future and limit losses in advance. The LME are also planning to make some changes to governance which may give some fresh perspective.

Trust is a fragile and precious commodity that is hard to regain once lost. The LME will have a tough job in rebuilding trust and demonstrating their capabilities in managing a robust and fair marketplace for metals.

LME’s CEO Matthew Chamberlain reversed his earlier decision to leave and run a crypto start up and will now stay and help steer the exchange from the nickel fall out – introducing reforms that can help fix and modernise the metals market and rebuild its reputation and role.

In a new blow, the LME announced on the 22 April that they will end gold and silver contracts due to low levels of trading. This could make trading these metals in London harder and likely that global exchanges such as Shanghai and Chicago will swoop in and fill the gap. Investors may look to these alternative exchanges even more if the LME doesn’t recover and reform.

Boris Ivanov is the founder of Emiral Resources and an expert in global commodities markets. Emiral is an independent international mining company that offers proven expertise in the mining value chain from mineral exploration, production, operation, advisory, and also engineering for mining, oil and gas industries.

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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