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Nickel: what happens next after 400% price surge this week?

Nickel: what happens next after 400% price surge this week?

Nickel prices spiralled out of control this week, rising by about 400% before the London Metal Exchange suspended trading and cancelled several hours’ worth of trade on Tuesday. So, what happened and where are nickel prices likely to settle once the storm is over?

The spark, as is the case with most markets these days, came from Russia’s invasion into Ukraine (the country produces just under 10% of the global nickel) eventually causing a full-blown explosion as it revealed the large short position held by Chinese entrepreneur Xiang Guangda.

Guangda, through his company Tsingshan Holding Group, had placed a large bet on nickel prices falling this year – not surprisingly because Tsingshan Holding is one of the world’s largest producers of nickel and steel and some of its production decisions knocked down prices in 2021.

But Tsingshan didn’t count on Putin. Cue Russia’s invasion and the nickel market, which is much slimmer than copper or aluminium and therefore prone to large swings, went from trading at $25,450/t on 1 March to $100,000/t by 8 March, triggering the LME’s trading halt.

According to Bloomberg the short position held by Tsingshan could have incurred a loss of as much a $2 billion on Monday. The position has still not been fully unwound and the company could still be holding around 150,000 tonnes in short positions.

Tsingshan’s position is actually not unusual. Metal producers typically hold a short position in the market; that way, if metal prices go up they gain because their revenues increase and if metal prices drop they make up some of the loss in metal sales revenue by income from futures trading. It is just that the size of Guangda’s position is too large for a futures market the size of nickel.

Where do nickel prices go from here?

Before the short squeeze started, the International Nickel Study Group was forecasting that the supply of nickel, which is mainly used in the production of stainless steel and for electric car batteries, would be in balance in 2022 and that prices would stay strong. The price they were referring to was the price at the end of 2021 which was close to $21,000/t and not today’s $48,240/t.

Ironically, during 2021 two production decisions by Tsingshan Holding Group sent nickel prices lower when the company started using a cheaper process to make an intermediate nickel product that can be used in electric car batteries and then signed large sale contracts with Chinese EV battery makers.

So the nickel price moves are likely to pan out in three steps. Firstly, traders will wait for Tsingshan Holding to unwind the remainder of its short position and will try to keep prices high for a short while. With a thin market like nickel sharp jolts up or down are very likely.

Once that is unravelled, prices will start declining to an interim level which will still be higher than at the start of the year because of the conflict in Ukraine. With sanctions against Russia in place, and potentially tightening, it is unclear what will happen with the country’s exports of nickel and which stainless steel producers will have to make emergency purchases to make up for the loss of Russian metal. Towards the end of the year, however, it is more likely that nickel prices will be much closer to the lower $20,000/t level.

Nickel ETFs

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
Hargreaves Lansdown | Interactive Investor | AJ Bell Youinvest | EQi
JE00BYQY5X15 3NIL USD

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