The Nickel Futures incident in 2022 has had a rippling effect that continues to affect the London Metal Exchange (LME) market today. Based on Interntationalbanker.com, in March 2022, a short position by “Tsingshan caused nickel prices to surge by 250 per cent in a couple of days”. To protect investors and traders, LME proceeded to suspend the trading of nickel. Wall Street Journal continues to elaborate that if LME had not cancelled those trades, and allowed prices to stand at over $100,000, Tsingshan would have owed the group an estimated $15 billion. Ultimately, Guangda faced a “whopping $9 million margin call” and received loans to cover its position.
As a result of the event, the market was closed temporarily, eventually resuming on March 16, 2022.
On March 8, 2023, Reuters reports that the LME is still “fighting to mend its reputation amid a host of lawsuits, vigorous action by regulators, and struggling volumes, in a short duration nickel prices”.
Investors hoped the CME Group would launch a rival contract as it already has aluminium, steel, and copper for trading. However, on April 24, 2023, CME Group announced that it has no plans to launch a nickel contract to rival LME, and the chair and executive of the group, Terry Duffy mentioned that “I’m not working on listing a nickel contract”, while CME and LME both declined to comment.
Given the range of circumstances that have affected the LME Nickel market, this article will provide more information regarding the aftermath of the incident and address existing procedures that have been implemented.
About Nickel Futures
Mainly, nickel refers to 2 main sources, sulphide nickel or laterite nickel ores. In recent years, laterite has become the predominant source of supply, accounting for up to 70% of sources. Nickel has also rapidly emerged as one of the most demanded products due to its use in manufacturing, development. Moreover, for countries such as Indonesia, downstream processes that drive nickel production such as mining or refinement are encouraged to drive economic growth.
Nickel Futures aid in this process of trade across the value chain through price discovery, risk management, market liquidity, and investment opportunities.
Additionally, nickel is also traded domestically (in China) in the Shanghai Futures Exchange. Though the product has not been released to international traders, this article provides an overview of market circumstances for price references.
LME Asia Week and the Outlook for Nickel
On the LME Asia Week 2023 held in Hong Kong, Nickel was one of the metals that were referred to by Chen Yan, Head of Basic Materials and Engineering Research, CICC. Through their research, it was discovered that the nickel market has grown by 70% from 2015 to 2022.
Subsequently, one of the largest key players in prices is Indonesia. The country accounts for 38% of global production, and new supplies are mainly from Indonesia. In total, it is expected by Chen that the planned projects in Indonesia could contribute 0.2mn metal tonnes of new capacity in 2022, and about 0.9mn metal tonnes in 2025, giving Indonesia an eventual total capacity of 1.2mn tonnes.
Apart from demand and supply factors, it was also mentioned that the futures market is additionally affected by market sentiments simultaneously. For Nickel futures, the revolution of the laterites would alleviate the supply shortage and reduce production costs. Yet, with geopolitics and the energy crisis, low inventory, and other policy-related factors, the market is bullish on nickel futures, resulting in high futures prices.
Source: LME Asia Week 2023, Chen Yan, Head of Basic Materials and Engineering Research, Bloomberg Intelligence
From the monthly Orient Futures Singapore monthly report, on the supply side, there are strong expectations for the increased production capacity of refined nickel, indicating potential growth. From China, SHFE inventories have reversed from a decline to an increase, this has resulted in the exerting of downward pressure on nickel prices.
On the other hand, refined nickel inventories on exchanges are decreasing, LME inventories are decreasing, and bonded zone inventories remain stable.
For traders, there is expected to be limited downside potential for nickel prices, and the current large basis makes it unsuitable for selling futures for hedging. For businesses holding long-term inventory or businesses anticipating sales, a strategy of selling hedging positions on rebound may be considered. Due to the high market volatility present, the use of options is not recommended.
Source: Shanghai Orient Research report, 东证期货_月度报告_产业研究_宏观风起，大宗价摇。多舛之际，风险何在？
Market News
China's refined nickel imports decreased by 30.40% in February as compared to January, but there is pressure on the import of primary nickel, which supports domestic supply growth. At the same time, the release of first-tier nickel production capacity is limited in the short term, and there is no clear trend of accumulation in global refined nickel inventories, which also affects the trend of nickel prices. Therefore, there may be a possibility of nickel price volatility and consolidation in the short term.
Source:Weekly Data Report 22.03.2023 by Shanghai Orient Futures and Orient Futures Research Institute.
Based on the report on 5th May by XMM (news.metal.com), SHFE nickel surged early trading on 5th may, affected by the overseas nickel prices. While spot premiums trended lower, absolute prices remained high. In general, low spot supply at home and abroad continues to beef up nickel prices and SHFE prices are expected to move range bound.
Updates from Chinese Exchanges
China Future Exchanges recently reduce trading margin/commission ad loosen trading limits to encourage trading on Commodity Futures and Stock Index Futures:
1) For Commodity Futures: DCE/SHFE/INE reduce the trading margin and loosens the daily trading limit on a list of active products.
2) For Stock Index Futures CFFEX reduce the intraday trading commission on all listed stock index futures – the 5th time loosening the restriction of stock index futures trading since 2015.
This is a good signal showing the efforts of exchanges and regulators to encourage trading, liquidity, and the efficiency of contract pricing. We are also looking forward to further development and open-up of the market.
Source:Weekly Data Report 19.04.2023 by Shanghai Orient Futures and Orient Futures Research Institute.
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Being an Overseas Intermediary of Shanghai International Energy Exchange (INE), Dalian Commodity Exchange (DCE), and Zhengzhou Commodity Exchange (ZCE), when foreign clients participate in internationalised futures contracts in these Chinese markets with us, they have direct access to trading, clearing, and settlement. Our parent company, Shanghai Orient Futures, is the largest broker in terms of aggregated volume across the five regulated exchanges in China.
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