Big questions were raised in March over trading activity in the nickel market on the London Metals Exchange, questions that have now given rise to a number of probes, including an independent review by the LME itself, and one from the UK regulator. The Bank of England also sounds like it is getting in on the action.
The LME is currently playing defence, and is arguing that it cannot be held accountable for big trades that come in via banks, and which ultimately the exchange can’t see. This may be why the Bank of England is getting involved. We saw some violent price swings in the nickel price on 8 March, which saw the metal rise in price by 250%. This was partly driven by fears that the start of the war between Russia and Ukraine and the subsequent sanctions would disrupt global nickel supplies.
What went wrong with the LME’s nickel trading?
The volatility forced the LME to cancel what amounted to a full day of trading, and cost many large traders the opportunity to profit from these gains. It also raised questions in some quarters on the viability of the price setting mechanism as it stands at the moment. Currently the involvement of big investment banks, which constitute a lot of the revenue-yielding activity, is a big area of investigation. But the involvement of very large players in the market, like China’s Tsingshan Holding Group, also needs to be looked at.
The LME is arguing that it needs more transparency over the over-the-counter nickel market, and indeed further reforms may be needed for the entire base metals market. It seems as if bigger players are able to accumulate large positions by using multiple banks, positions that can lead to the sort of chaos we saw in March. Some brokers are pushing back, arguing that if sufficient margin is posted, then the exchange should just stay out of their business.
Electronic trading is also now playing a role in bringing in more volatility in metals prices, particularly industrial metals. Price activity is attracting the attention of traders who have no intention of taking delivery of nickel, but are anticipating some big trends in this market as demand picks up.
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Why this could still be an issue for the LME
This could end up costing the LME severely over the longer term. CME Group is rumoured to be looking at introducing a cash-settled nickel contract that would let companies hedge costs (although no official statement from CME has been forthcoming to date). This is significant as it would offer traders an alterative venue to the LME. The spike in London in March was driven by expectations that Tsingshan Holdings, which was actually short nickel, would have to cover its positions in the wake of the Russian invasion.
The CME may be hampered by a lack of nickel in its warehouses – its current base metals contracts are physically deliverable. Volumes are also generally a fraction of those achieved in the LME.
Other alternatives include the Shanghai Futures Exchange, but this has contracts priced in yuan, and traders need to be affiliated with a local Chinese entity to participate in that market. Certainly it looks like the whole affair has affected credibility in the LME, with nickel volumes well down since 8 March, despite this being such a hot commodity right now.