China’s Influence Over Metals Trading Creates Advantage for Its Domestic Enterprises

The London Metal Exchange suspended nickel trading because of the Tsingshan (THG) nickel incident, the first time since 1985 that the LME has suspended trading in a metal, in London, on March 8, 2022. The graph shows the one-day rise and fall of nickel prices on the London Stock Exchange. Ben Stansall/AFP

Commentary

Chinese stainless steel giant Tsingshan Holding Group (THG) has relied for many years on short selling to reduce its future costs for nickel, a key component of stainless steel and a major ingredient in lithium-ion batteries. But rather than nickel prices falling as hoped, the price skyrocketed to more than $100,000 per ton on March 8, one day before THG’s 200,000-ton short sell contract was due on March 9.

The price of nickel went up even before Russia invaded Ukraine, reflecting the increasing demand for electric vehicle batteries and stainless steel. The price soared after the war started, as Russia produces 23 percent of the world’s high-quality nickel and has been sanctioned financially. The price rocketed as THG bought large amounts of nickel to reduce those short bets and its exposure to costly margin calls.

Some traders refer to this as the “Demon Nickel” incident. Within the futures market, the term “demon” refers to the difficulties associated with attempting to control the price of volatile futures.

The “Demon Nickel” incident unfolded rapidly on March 8, when the price per ton for nickel on the London Metal Exchange (LME) unexpectedly broke the average $60,000 to $70,000 mark and continued rising to more than $100,000 per ton. That was an unprecedented short squeeze, and THG’s staggering loss could be as high as $8 billion.

According to a report in China Securities Journal, THG’s failure to deliver the 200,000 tons of nickel short sells is because Russian nickel was kicked out of the LME trading market under the sanctions.

Somehow, on March 9, everything changed. The LME, a 145-year-old trading institution, announced that it was suspending the nickel trading market until March 15—the first time since 1985 that the LME has suspended trading in a metal. Then it retroactively canceled nickel trades executed on all venues from midnight until 8:15 a.m. on March 8 when trading stopped. The LME also postponed delivery of all settled nickel contracts due for March 9 to March 23 and set daily limits on nickel price fluctuations before resuming nickel trading.

The LME itself called these actions “unprecedented.”

To prevent future losses of this magnitude, THG announced on March 15 that it was collaborating with the LME and a syndicate of futures bank creditors and had reached a silent agreement that would help to resolve the major issues over its short positions. The agreement shows that during the silent period, THG doesn’t need to add margins and won’t be forced to close the deal.

Founded in 1988 and based in Wenzhou, Zhejiang Province, China, THG is one of the world’s top producers of stainless steel. It also maintains operations in Indonesia, India, and Zimbabwe. In recent years, THG has had an effect on global prices because of its pioneering use of low-grade nickel pig iron. It currently ranks 14th among China’s top 500 private enterprises.