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March 2022 will go down in the history books as the moment the global nickel market broke down.
The London Metal Exchange’s (LME) six-day suspension of nickel trading plunged the global supply chain into pricing darkness.
The LME contract is the anchor around which producers, users and traders price a spectrum of nickel products, from refined metal to ferronickel to the new stream of sulphate heading for electric vehicle batteries.
Or at least they used to.
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The LME contract has returned, but it is much diminished. Volumes have near halved since March, the lack of liquidity accentuating continuing price wildness.
Don’t look to Shanghai for an answer. The Shanghai Futures Exchange has experienced an even more pronounced collapse in activity, volumes slumping by 70% last year amid rolling time-spread volatility.
The search is on for a new nickel price discovery process.
Global Commodities Holdings (GCH) thinks it has a solution, a blast from the LME’s own distant past that could have far-reaching consequences for industrial metals trading.
GCH operates globalCOAL, a trading platform for thermal and metallurgical coal with 3,000 registered users.
Market members include the likes of Anglo-American, BHP, Jindal Stainless, ArcelorMittal, Glencore and Trafigura, all of whom are major players in the nickel supply chain.
GCH is proposing to replicate its spot coal indices in the nickel market with a refined metal index due to be launched by the end of the first quarter.
All forms of Class I nickel will be traded on the company’s platform, but the spot index will be defined by briquettes and full-plate cathodes, the two most liquid physical shapes.
A daily settlement price will be derived from physical orders and trades across the front two months for deliveries to Baltimore, Jebel Ali, Amsterdam/Rotterdam/Antwerp, Singapore, Kaohsiung, Johor, Busan and Shanghai. The minimum transaction will be 20 tonnes, equivalent to a container.
GCH is headed by Martin Abbott, who was the LME’s chief executive officer from 2006 to 2013, but the echoes from the past don’t end there.
GlobalCOAL, with pricing referenced to physical cargoes traded between producers, power operators, steel companies and trading houses, is a hark-back to the earliest days of the LME itself.
When the London metals market was first formally established in 1877, it was a way of pricing physical cargoes of metal heading to what was at the time the world’s industrial power house.
The LME’s arcane trading system still bears the imprint of its genesis. The unusual three-month benchmark price was born out of shipping times for Chilean copper and Malaysian tin. The bewildering multi-day rolling prompt system evolved from the vagaries of port arrivals.
The proposed new nickel index is in many ways a return to those basics, a price-discovery process based on physical shipments traded between industry players with direct skin in the pricing game.
GCH’s business model is to license its indices to a futures exchange, which can expand a spot index into a full tradeable forward curve.
Its NEWCIndex, a benchmark reference point for thermal coal in the Asia-Pacific region, is used as the settlement price for the gC NEWC Futures contract traded and cleared by ICE Europe.
With an entire industry looking for an alternative to price discovery on the wounded LME contract, there will be no shortage of prospective futures partners if GCH’s nickel index can establish itself.
The CME has been rapidly building out its industrial metals portfolio, but curiously has never offered a nickel product.
The LME itself may be a possible suitor.
With trading activity bombed out and legal action by disaffected funds looming large, it’s hard to see how the exchange can recover any time soon its credibility as a global nickel pricing venue.
The relationship between the grand old dame of metals trading and Old King Coal could be an intriguing one.
“There is a dislocation in the price discovery process for spot nickel, with the weight of futures transactions being too heavy for the existing settlement process,” said Abbott in GCH’s Dec. 22 announcement.
“There is a very strong argument for separating spot price discovery from futures market activity, allowing both functions to thrive,” he added.
This is self-evidently true of the LME nickel contract, which simply could not absorb the scale of short positions accumulated by China’s Tsingshan Group.
The fact that Tsingshan’s massive nickel operations don’t produce the sort of metal deliverable against the LME contract simply compounded the blow-up.
But Abbott’s point about the weight of futures transactions on a pricing structure designed for a pre-fund age may resonate further than the nickel market.
The LME has been aggressively chasing volumes ever since its purchase by Hong Kong Exchanges and Clearing in 2012 with an influx of financial players, many of them algorithmic and high-frequency traders.
Traditional industrial users have balked at what they view as the undue pricing influence of fund money. The tension has resulted in repeated clashes over exchange efforts to modernize its trading system to accommodate financial newcomers.
Every functioning commodity market is based on the interplay of industrial hedging and speculation but, as Abbott points out, it doesn’t have to be on the same venue.
Particularly when that venue has liquidity spread across every date between cash and three months and is backed by diminishing amounts of warehouse inventory.
The last two years have seen wildness spread through the LME metals suite. Copper was put into special measures in October 2021 to pre-empt what was in danger of becoming a disorderly market. Tin had already suffered an unprecedented blow-out in time spreads.
The breakdown in nickel pricing, although uniquely extreme, can be seen as part of a broader pattern of low inventory combined with heightened speculative activity to fuel price volatility.
The result has not been a happy one for industrial metal users.
It may not just be nickel players keeping a close eye on GCH’s proposed new metals pricing solution.
(The opinions expressed here are those of the author, Andy Home, a columnist for Reuters.)
(Editing by Jan Harvey)
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