LME nickel trade was crazy again this week (November 14-18, 2022). On Monday, the price of LME three-month nickel rose briefly to above $30000 per ton for the first time since June, violating the new daily limit of 15% price fluctuation. After reaching the highest price of $31275 since early May on Tuesday, the price then plummeted to $25800 per ton. LME responded by raising the initial margin by 28% to US $6100 per ton from Friday’s closing price and strengthening market surveillance activities.  

Both the exchange and the nickel market are now paying the price for the collapse in March, when LME suspended trading and cancelled trading. This decision is now being challenged by the British court.  

With the grant of funds, the transaction liquidity of the terrible nickel LME and the Shanghai Futures Exchange (ShFE) has shrunk significantly, injecting more volatility into a market that is prone to severe price fluctuations under the best circumstances.

01  Fluctuation trap

The capital outflow after March left a liquidity vacuum and a self strengthening fluctuation trap for the nickel market.

Goldman Sachs warned in April: “The lack of venture capital will reduce market participation, depress liquidity, increase volatility, further hit potential lenders and investors, and increase participation and volatility.”.

Since March, the trading volume of LME nickel has dropped sharply. The average daily turnover in October was 32811, down 54% year on year, the lowest level in at least a decade.

So far this year, the trading volume of nickel is 24% lower than that of the same period last year, thanks to the strong trading activities in January and February. The decline in participation is more obvious in Shanghai, where the trading volume of the Shanghai Futures Exchange has decreased by 71% in the first 10 months of 2022.

Open positions at the end of October were 41% lower than those in October 2021. Although the low liquidity has caused obvious price fluctuation in London, the time price difference has been in a calm state.

In contrast, in Shanghai, what is particularly difficult to control is the price difference. The decline in liquidity is consistent with the ultra-low exchange stocks and the long-standing spot premium structure. The registered inventory of the Shanghai Futures Exchange is only 4634 tons, which has been less than 10000 tons since April last year, causing a rolling squeeze before the turbulence of the London market this year. The exchange hopes to repair liquid nickel compacts by expanding its limited list of deliverable brands However, before the reconstruction of inventory and trading volume, the long time span turbulence and permanent spot premium are becoming the new normal of Shanghai market.

02 Rumor factory

The trading situation in London and Shanghai has intensified the price fluctuation in the market, which does not lack potential news triggers:

1. Indonesia plans to increase export tariffs (already known);

2. An Indonesian manufacturer caught fire (quickly denied);

3. Nornickel’s raw material supply from Russian mines to Finnish refineries may be interrupted.

The latter is proved to be at least partially true. VR Group, a Finnish railway operator, will suspend Russian freight transport from next year, although Nornickel is studying other transport options, including maritime transport.

The study on the possible causes of the bull market also found that Prony Resources’ factory in Wulang New Caledonia will operate at a lower speed in the fourth quarter due to a slight tailings leakage.

None of these “news” can explain why nickel prices have risen 40% since the beginning of November.

On the contrary, it highlights that rumors can easily upset a illiquid market. Nickel is now particularly sensitive to news streams. The status of Russian metals is becoming more and more important, not only because Nornickel is a large producer, but also because its nickel (primary refined nickel) can be traded in LME and Shanghai Futures Exchange. LME decided not to suspend nickel exports to Russia, but as long as Russia continued its “special military operations” in Ukraine, the threat of government sanctions would exist. This uncertainty around a key link in the global supply chain will also translate into price fluctuations in the best case. In the current low trading volume futures market, this is a formula for the future more wild. Similarly, the recently purchased December call options may also rise, such as $30000 (489 hands now), $35000 (360 hands) or even $55000 (25 hands). If prices start to rise again, is it the performance of a bull market boom or a potential bull market trap?

The size of these positions is usually not enough to have an option accelerator effect on the bull market trend, but from the current trading volume, it seems that everything is possible in this market.

03 Market disjunction

The physical nickel market is booming because it is ready to meet the new demand for electric vehicle batteries, but at the same time it has lost the ability to hedge its growing price risk. This disconnect has lasted for several years.

None of the nickel flowing from Indonesia, the new global production center, to China’s huge battery industry is a metal that can be delivered at LME or Shanghai Futures Exchange. This mismatch between the bill market and the physical market was a key factor in the chaos in March.

Compared with its huge production flow, Aoyama Group’s huge short position is simply too big for a market defined by shrinking primary departments in the supply chain. The events in March and the resulting depletion of liquidity accelerated the price differentiation.

The long-term solution will be to launch different exchange traded contracts for intermediate products such as ferronickel, mixed hydroxide payables or nickel sulfate. In this way, users have a financial structure in which they can customize their price exposure for specific products.

However, it is far from known whether the new field of nickel industry for batteries has been fully developed and can create standardized alternative pricing methods. Before that, LME and Shanghai Futures Exchange will have to manage their troubled nickel market, and more restrictions may be necessary.