CHARTS: The coming critical minerals trade war is BRICS short of a load
"While a large number of countries around the world continue to talk about securing raw material supply, China is actually doing something about it."
One year after nickel trading went haywire on the London Metal Exchange (LME), the 146-year old exchange is fighting to mend its reputation amid a host of lawsuits, vigorous action by regulators and struggling volumes.
The impact of March 8, 2022, will last years after nickel prices erupted in a record-breaking surge, forcing the world’s largest forum for metals to halt trading and void billions of dollars worth of nickel deals, angering many investors.
The danger is the aftershocks of last year’s events could mean the LME’s nickel contract fails to regain its benchmark status as the CME Group, Shanghai Futures Exchange and others manoeuvre for a slice of the nickel pie.
Volumes have slumped as many investors, traders, consumers and producers abandoned LME nickel in the wake of the chaos.
Over the past few days, the LME has been hit with new lawsuits in addition to existing legal action by US hedge fund Elliott Associates and Jane Street Global Trading, which are suing the LME for a total of $472 million.
“The resources these cases are going to need are phenomenal and coupled with the enforcement investigation it means the LME won’t be focusing on its main job, which is to run an exchange,” said a senior metals broker.
Last Friday, Britain’s Financial Conduct Authority (FCA) launched its first ever investigation of a UK exchange for potential misconduct.
The same day, the Bank of England said its reviews had pointed to several shortcomings at LME clearing house LME Clear, adding it would name an independent monitor.
The nickel crisis, spurred partly by over-the-counter (OTC) short nickel positions, has prompted reforms by the LME, including 15% price limits and OTC position reporting.
The regulatory actions and legal cases will stoke debate within the financial community about the timing of the LME’s controversial decision to cancel trades.
“Did the LME act quickly enough? Possibly not. The warnings were there in January and February,” said Malcolm Freeman, chief executive of broker Kingdom Futures.
Metal industry sources say the LME needs all its focus and energy to rebuild its nickel contract.
Futures and options nickel volumes last month were at only 58% of the levels in February last year.
One bright spot for the LME is its planned restart of nickel trading during Asian hours on March 20, providing a possible boost for liquidity.
Rivals of the LME, owned by Hong Kong Exchanges and Clearing, are looking to exploit the exchange’s current perceived weakness.
The CME plans to launch a nickel contract settled with prices gathered from a platform to be launched by UK-based Global Commodities Holdings, sources told Reuters last month.
Moreover, the LME is grappling with a major disconnect with the physical market, dominated by nickel pig iron which cannot be delivered against LME contracts.
Nickel that can be delivered against the LME’s contract comprised just 20% of global supplies last year.
“Loss of confidence in the exchange and its nickel contract have created a vicious cycle of lower volumes and liquidity, which is going to be tough to restore,” a metal industry veteran said.
(By Eric Onstad and Pratima Desai; Editing by Veronica Brown and Mark Potter)
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