Fallout From London Nickel Trading Fiasco Will Be Extensive, Expert Says

Fallout From London Nickel Trading Fiasco Will Be Extensive, Expert Says
Traders, brokers and clerks shout and gesture on the first day of in-person trading at the London Metal Exchange (LME) on September 06, 2021 in London, England. (Leon Neal/Getty Images)
Michael Washburn
Gary Bai
The London Metal Exchange’s (LME) extraordinary decision on March 8 to halt nickel trading after a short squeeze, triggered by a Chinese metal tycoon’s large short position, sent the commodity price skyrocketing to more than $100,000 a ton. The incident is likely to have far-reaching ramifications for Chinese firms in global markets, according to Christopher Balding, an economist and analyst of Chinese business affairs.

Since Russia’s invasion of Ukraine, the price of nickel, a metal heavily in demand for the manufacture of electronic vehicles and other uses, had risen partly as a result of the heavy concentration of deposits of the precious metal in Russia, which massive sanctions have now cut off from much of the world.

The spike in the commodity price frustrated a huge short position held by Xiang Guangda, founder of Tsingshan Holding Group, one of the world’s biggest nickel and stainless steel producers. Guangda bet that nickel prices would go down, not up.

When nickel’s trading price surged dramatically in early March, Tsingshan struggled to pay margin calls, putting its creditors in a difficult position. The price rise was further fueled as brokers and bankers of Tsingshan rushed to buy back nickel contracts to stem losses. At its peak, prices shot up to a record $100,000 a ton.

The exchange stopped nickel trading after several small brokers claimed that they would default if prices remained at record levels, according to a Wall Street Journal article. It was the first time the LME had halted trading since 1988.
Tsignshan is now reportedly facing billions in trading losses; The largest counterparty to the bet, JPMorgan Chase, reportedly had $1 billion in exposures.
The resumption of the nickel trade on the London exchange began tentatively on March 16, with daily upper and lower price limits in place.
According to Financial Times, the exchange canceled all 5,000 nickel trades worth nearly $4 billion that had been executed on March 8.

LME’s move to halt trading raises “very serious concerns,” according to Balding, who said the exchange was shut down “basically to protect a specific Chinese company from incurring the losses … when the price of metals skyrocketed.”

“I suspect the reason it isn’t being talked about is because of the events in Ukraine,” he told The Epoch Times.

“This will absolutely prove a watershed moment, especially when governments are considering whether or not they should be allowing Chinese firms as key stakeholders in markets, whether they’re commodity or stock markets.”

Balding added that the events of March 8 were not only “a serious blow” to the London Metal Exchange but are likely to make themselves felt in the markets of Chicago and New York, where many participants place their faith in “high-quality trading venues” backed up by a sound legal system.

“I believe that in the days and weeks and months ahead that this would prove a very consequential and serious event as we look back, primarily in how financial traders and financial market participants treat the CCP’s involvement in markets around the world,” Balding said.

“When they are currently leaning on the scales of a market to benefit certain Chinese parties, that tends to be frowned upon by market participants,” he added. “That’s going to have a significant impact on how countries view Chinese involvement in their markets in the future.”

These developments come at a time when the Chinese economy already faced “a significantly more difficult year,” Balding said. He alluded to the CCP Congress coming up in the fall, at which leader Xi Jinping could be appointed to a third term as party secretary if not toppled in intraparty factional battles.

“This is what in China effectively amounts to a reelection campaign year, where they like to generally have very strong economic numbers with the reelection. So, with the high debt levels and export numbers expected to be flat from the previous year, there’s going to be a lot of pressure on the Chinese economy in 2022,” he said.
Michael Washburn was a New York-based reporter who covered U.S. and China-related topics for The Epoch Times. He has a background in legal and financial journalism, and also writes about arts and culture. Additionally, he is the host of the weekly podcast Reading the Globe. His books include “The Uprooted and Other Stories,” “When We're Grownups,” and “Stranger, Stranger.”