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Nickel futures market changing tack after the LME short squeeze

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Nickel prices have rallied by over 9% this week after the UK imposed sanctions on the Russian oligarch Vladimir Potanin, the chief executive and the largest shareholder of Russia’s Norilsk Nickel.

The full extent of how this will affect the nickel market will only become clear over the weeks to come as Potanin, who has an estimated net worth of over $15 billion, seeks a legal solution out of the situation. The sanctions include a travel ban, transport sanctions and a freeze of personal assets and as Potanin holds a 36% stake in Norilsk Nickel this will have implications not only on the company’s ownership structure but also for its export contracts.

Nornickel, as it is known in Russia, dominates not only the global supply of nickel, the metal needed to make stainless steel, but also the precious metal palladium which is widely used in cars to reduce emissions.

When faced with a similar situation in the past other Russian oligarchs who have held large stakes in raw materials companies have extricated themselves from their ownership allowing the company to continue its business unaffected. This doesn’t seem to be Potanin’s first choice and he has instead opted for a find a legal way out. For the moment, the sanctions on the oligarch have only been imposed by the UK but with previous sanctions on Russian raw materials the European Union followed with the same decision within weeks after the UK.

A stormy market for nickel futures

Nickel trading has been nothing if not stormy this year. During a few short weeks in March the London Metal Exchange‘s three-month nickel futures doubled from around $24,000 a tonne to $48,000/t after the owner of China’s steel and nickel producer Tsingshan Holding Group was caught out with a large short position. After the squeeze unwound prices returned back to their March starting point. As the war in Ukraine has worn on traders have kept a close eye on sanctions against Russia because of the country’s role in the metals and energy markets.

What could have been a stronger rally in nickel is being dampened by the rising global inflationary pressures and capping effect on raw materials demand.

Note that law suits against the London Metal Exchange recently, one of the foremost trading venues in nickel, are also having an effect. LME nickel contracts have traditionally been used to hedge price risk in the market if you are either a producer or a consumer of nickel sulphate, but now some players are considering alternatives. Nickel sulphate is a key ingredient for nickel-cobalt-manganese batteries, and is in turn reliant on nickel briquettes for its production.

Chinese refiners changing tack

According to S&P Global, Chinese refiners are looking to switch out of nickel briquettes due to high metals prices and into cheaper alternatives like MHP and nickel matte. But these are not counted as deliverables either by the  LME or indeed the Shanghai Futures Exchange. Hence current nickel contracts have yet to reflect this fairly  strategic shift. What you are seeing is a divergence between the LME 3-month nickel contract and Platts nickel sulphate China index.

Average daily trading on LME nickel futures is down since the March short squeeze, reflecting loss of confidence in the exchange. European traders are looking at potentially using Shanghai prices at the moment, but are complaining that it represents logistical challenges at the moment. And Shanghai prices still only reflect the nickel metal price.

One other thing to bear in mind: battery manufacturing only consumes a fraction of the overall global nickel production. Stainless steel is still the big market for nickel. Some 70% of production goes into stainless steel manufacturing. Capacity expansion in both China and Indonesia is being forecast by S&P, although some other pundits are concerned that this will in turn be hit by any global recession in 2H. Growth in battery manufacturing is going to pick up, however, and will also have an important role to play as we go into 2023.

Nickel ETFs from WisdomTree

Product Name ISIN Exchange Ticker Listing Currency
WisdomTree Nickel
Hargreaves Lansdown | Interactive Investor AJ Bell Youinvest | Charles Stanley Direct | EQi
GB00B15KY211 NICK USD
WisdomTree Nickel – EUR Daily Hedged
EQi
JE00B6XL6W59 ENIK EUR
WisdomTree Nickel 1x Daily Short
Hargreaves Lansdown | Interactive Investor | AJ Bell Youinvest | EQi
JE00B24DKJ77 SNIK USD
WisdomTree Nickel 2x Daily Leveraged
Hargreaves Lansdown | Interactive Investor | AJ Bell Youinvest | EQi
JE00BDD9QB77 LNIK USD
WisdomTree Nickel 3x Daily Leveraged
Interactive Investor | AJ Bell Youinvest | EQi
JE00BYQY5X15 3NIL USD

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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