What happened?
After The London Metal Exchange (LME) had to announce a suspension of trading after The Nickel staged an "epic shortfall" market, a move that is considered the biggest crisis that the LME has encountered in decades.
On Tuesday, Lun Nickel continued Monday's crazy rally, surging more than 110% during the day to break through $100,000 per ton, with a cumulative increase of 250% in two days.
At a time when the market is "stunned", LME urgently announced that it will suspend nickel trading and does not expect to restart nickel trading until March 11, that is, this Friday.
In addition, LME has also decided to cancel all nickel trades executed on or after 00:00 UK time on or after OTC and the LME select screen trading system, and will postpone the delivery of all spot nickel contracts originally scheduled for delivery on 9 March 2022.
In other words, the transaction on March 8 is completely void. According to the LME, on the day trading resumed, the increase or decrease was based on the Closing Price on March 7. In addition, even after the restart, the transaction will only take place during the European time period at the beginning, and there is a 10% limit on daily price fluctuations.
Why did the LME do this?
LME's action comes as the nickel market is in an unprecedented short-selling situation.
According to Reuters quoting Kingdom Futures analyst Malcolm Freeman, the reason for the surge in nickel prices is the confrontation between two major traders, "there is a very large short and a very large bull has been fighting, and because of them, it has also hurt a lot of other bears." ”
LME data shows that one entity controls 50 to 80 percent of LME nickel inventories.
Freeman declined to name the two companies. However, according to China Securities News, there has been market news that because Russian nickel has been kicked out of the exchange can not be delivered, Tsingshan Holdings opened a 200,000 tons of nickel short order may not be able to hand over spot, Swiss Glencore or the use of LME nickel trading to force Qingshan, and then claim its 60% equity in Indonesian nickel mines, Tsingshan Holdings floating losses will exceed 8 billion US dollars.
According to the International Finance News, a staff member of Qingshan Holdings responded yesterday that he was not aware of the rumors of short-selling. According to another report, the relevant personnel of Glencore of Switzerland replied, "The above statement is complete nonsense (total nonsense)." ”
At present, the story behind the short space is still confused, but LME has had to intervene to prevent the chaos from escalating.
LME said it was studying a mechanism to reduce short positions in the market before restarting by "netting out" a large number of long and short position holders on a voluntary basis. The LME said it will actively plan the reopening of the nickel market and will announce the relevant mechanisms to the market as soon as possible.
The last time LME suspended trading for one of its contracts was during the "tin crisis" in 1985, when LME suspended tin trading for 4 years due to the collapse of the International Tin Council:
In the 1980s, as aluminum alloys and plastics began to be widely used in the packaging industry, the consumption of tin decreased year by year. The International Tin Association continues to manipulate and artificially maintain high prices by buying heavily on the London Metal Exchange. At this time, some of the big international speculators- European and American funds began to sell a large number of tin on the London Metal Exchange. From the early 1980s to October 1985, the Fund and the International Tin Council competed fiercely for each other. During this period, the fund suppressed the price from $25,000/ton to about $20,000/ton, and the International Tin Council rose from $20,000 to $23,000. The fund was then again pushed from $23,000 to around $18,000. The two sides then engaged in a fierce battle around $20,000. In October 1985, the membership of the International Tin Council finally collapsed, and a large number of its bulls collapsed as prices plummeted. However, due to their refusal to perform the contract after declaring the government's action force majeure, the agency brokerage companies suffered heavy losses of billions of dollars, and the London Metal Exchange was forced to close tin trading.
At the time, the LME solved the problem of the actual default of the largest market participants by implementing a so-called "ring-out" process. During the trading suspension period, open positions with higher quotations on the LME end up being filled at a lower price.
According to Reuters, citing some industry insiders, a similar solution may be needed to avoid another crazy rally when the market reopens, for example, the main holders of long and short positions agree to close their positions at a fixed price.
There are also some analyses that point out that LMEs are self-help.
What does it mean for LME?
Some media believe that this incident is the biggest crisis that LME, a 145-year-old exchange, has encountered in decades.
Founded in 1876, LME is the world's largest non-ferrous metals exchange, and the price and inventory of the exchange have a significant impact on the production and sale of non-ferrous metals worldwide. In 2012, LME was acquired by the Hong Kong Stock Exchange as an indirect wholly owned subsidiary.
But LME's move to suspend nickel trading has sparked much controversy, especially over its decision to allow Tuesday to open before canceling completed trades.
Michael Marlowe, director of Hythe Bay Metals Ltd, commented in an interview with Bloomberg: "Chaotic, shameful, catastrophic, devastating, whatever you want. Today is a devastating blow to all those who love LME and all those who use LME for their day-to-day business. ”
Alex Gerko, founder of XTX Markets, the London Stock Exchange's leading electronic market maker, said on social media that you can't do what LME does, it's the "end of the market".
The bitter lessons of the 1985 Tin Crisis, which changed the shape of the market, saw many long-established brokers forced to withdraw from their businesses due to losses. And according to LME, the pressures of the crisis at the time shortened the lives of many people.
Therefore, some people also agreed with the LME's decision this time. Kingdom Futures' Freeman told Bloomberg that a moratorium on nickel trading was "the right thing to do," saying: "LME needs to lock them in a room and tell them not to come out until an agreement is struck, it's as simple as that." ”
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