London Metal Exchange Faces Complaint From US Hedge Fund Group Over Cancelled Nickel Trades

Traders operate in the Ring, the open trading floor of the new London Metal Exchange (LME) in central London on Feb. 18, 2016. The Ring has provided a transparent and robust price-discovery process for the global metals industry for 139 years. (Leon Neal/AFP via Getty Images)

New Analysis

On June 1, U.S. hedge fund Elliot Management filed a suit against LME in the English High Court for $456 million over its controversial decision to suspend nickel futures contracts and cancel trades in early March.

A few days later, on June 6, trading house Jane Street also filed its case against the exchange for $15.34 million.

Both judicial review claims have similar messages. Elliott said the London Metal Exchange (LME) should not have halted trading and erased deals after prices more than doubled to over $100,000 per metric ton in a matter of hours on March 8. It said that LME’s trading suspension and trades cancellation “constituted a violation of [its] human rights,” adding that the act was unreasonable and irrational.

However, LME responded by denying the suit’s merit.

“The LME management is of the view that the claim is without merit, and the LME will contest it vigorously,” Hong Kong Exchange and Clearing (HKEX) commented on both suits.

“Changing rules equates to breach of contract, and no doubt, lawsuits will follow. The reputation of this century-old world trading center is under doubt, and investors will walk away for other trading markets,” Mike Sun, a U.S.-based investment consultant and China expert, told The Epoch Times.

‘Once-in-a-Century Opportunity’

U.S. hedge fund group Managed Funds Association (MFA), on June 8, also submitted a complaint to the LME about the nickel trades cancellation and contract suspension in March.

MFA said it believes that the LME failed to perform its regulatory obligations, resulting in a so-called “Demon Nickel” incident on March 8 that exposed the existence of a “Hong Kong backdoor.”

The hedge fund group, representing more than 150 member firms, expressed serious concerns in its complaint about how LME’s actions impacted market participants, including its member firms.

In the annex of MFA’s complaint letter (pdf), one, in particular, pointed out LME’s regulatory obligation to “identify and manage conflicts of interest between the LME and its owners.”

HKEX purchased all ordinary shares of LME on December 6, 2012, resulting in the resignations of 10 of the 12 directors. Then Chief Executive of HKEX Charles Li described the acquisition as “a once-in-a-century opportunity.”

The logo of Hong Kong Exchanges & Clearing Ltd. (HKEX) is seen in the financial Central district in Hong Kong, China, on Sept. 14, 2020. (Tyrone Siu/Reuters)

The Hong Kong government is the top shareholder of HKEX. According to HKEX’s rules, the appointment of the HKEX Chairman is subject to the written approval of the city’s Chief Executive.

Nickel, which traded between $22,750 and $25,260 a tonne in February, briefly hit $100,000 per metric ton in the March 8 trading session.

$12 Billion Marked-to-Market Loss

Christopher Balding, a specialist in the Chinese economy and financial markets, said that LME “[halted] trading to protect an effectively bankrupt Chinese firm.”

The world’s biggest nickel and stainless steel producer, China’s Tsingshan Holding Group, suffered a fiasco in a global capital sniping on the London Metal Exchange (LME) on March 7, with its 200,000-ton nickel forward contracts caught in a delivery default and facing potential losses of billions on its short positions.

But ahead of Tsingshan falling into a dilemma of delivery defaults, LME announced on March 8 that it would suspend nickel trading and cancel all nickel trades for the day, followed by a continuous halt in nickel dealing until March 11.

This is a rare suspension of metal trading on the LME the last of which occurred with tin in 1985.

Mark Thompson, the executive vice-chairman of the British mining company Tungsten West Ltd, wrote on Twitter on March 8 that his best guess was that Tsingshan’s marked-to-market loss would top $12 billion.

However, the Nickel market did not resume until March 16, after Tsingshan had reached a standstill agreement with banks and avoided margin calls of depositing additional cash and escaping from forced contract closures, Reuters reported.

In addition, LME started applying daily price limits—offering Tsingshan peace of mind with no soaring nickel prices similar to March 8.

Ranked 279 on the Fortune 500, Tsingshan is a Chinese nickel and stainless steel giant with footprints crossing China, America, Indonesia, India, and Zimbabwe.

CCP Is Behind the Scenes

Victor Ng Ming-Tak, a retired senior banker, spoke with Sarah Liang of The Hong Kong Epoch Times. Ng has more than 36-year experience in the Asian financial market, particularly in Hong Kong.

Ng said that the LME halted the nickel market and cancelled the nickel contracts to prevent Tsingshan from falling into bankruptcy. Behind the scenes, the Chinese Communist Party (CCP) instructed the LME to rescue Tsingshan, so China could still control the nickel mines in Indonesia.

Ng said: ”Compared with HKEX, Tsingshan is a more prominent enterprise. And the CCP can manipulate international nickel mines through Tsingshan—Tsingshan is higher than the HKEX on CCP’s list of priorities.”

The HKEX had to follow Beijing’s instructions, Ng added, even though the cancellation of nickel contracts could cost the HKEX its credibility and business.

According to HKEX’s annual report (pdf), 2021 revenue and other income are $20.950 billion, approximately 37 percent of Tsingshan’s $56 billion revenues in 2021. Nickel Industries (ASX: NIC) revealed Tsingshan’s revenue in its ASX announcement dated March 9, 2022 (pdf).

The Nickel Industries’s announcement also stated that Tsingshan had assurance that business was operating as usual and they had no intention of selling any shares. Additionally, the operations at collaborated projects, Hengjaya Nickel and Ranger Nickel in Indonesia, were “unaffected.”

Multiple Chinese media quoted Tsingshan’s chairman Xiang Guangda who spoke with Yicai, a Chinese state-owned media, on March 8—after the so-called “Demon Nickel” incident. However, despite being quoted by other Chinese media, what Xiang said seems to no longer be available on Yicai’s website.

“Today, I received many phone calls, relevant state agencies and leading officers are very supportive,” said Xiang. “Western companies have taken some actions, and we are coordinating actively [to deal with it].”

Ng said that the LME’s blatant disregard of rules was similar to what the CCP did in Hong Kong—pushing through the National Security Law by breaking international treaty obligations it made to maintain Hong Kong’s system for 50 years.

Obsessed by “The East is rising and the West is declining,” Ng said, the CCP is keen to have a louder voice in the global market, such as critical resources and high technology products like artificial intelligence and electric vehicles.

Chinese nickel and stainless steel giant Tsingshan has industrial capacities of nickel metal and crude stainless steel up to 300,000 tons and 10 million tons respectively per year. As the world’s largest nickel and stainless steel producer, Tsingshan said confidently on its website that it “plays a certain role in the industry.”

Classified by Beijing as a strategic metal, nickel is an essential metal for national economic and technological development.

HKEX Faces a Judicial Review

HKEX will face more judicial review claims, and the final claim figure may soar to 10 times the current cases, according to Ng’s analysis.

In his view, the “Demon Nickel” incident will affect the whole market, including Hong Kong’s position as a global financial hub.

Ng commented that HKEX’s reputation definitely has been damaged, but not to the extent of bankruptcy—legal cases could drag on for five to ten years.

Laura May-Lung Cha’s (pdf) re-appointment as the chairman of HKEX was approved by the Hong Kong regime on June 6, the same day that HKEX revealed the first legal claim.

Ng said that Cha has a legal background and can engage the world’s top legal advisors for assistance—she can hold off these legal claims for years. Ng said he believed that Cha would be re-appointed for the next term to deal with LME’s legal claims.

Cha has broad experience (pdf), including as the vice-chairman of the international advisory council of the China Securities Regulatory Commission. And she is also a member of the international advisory council of the China Banking Regulatory Commission.