April 2022
On the 8th of March 2022, the three-month nickel price suddenly soared to an unprecedented US$100,000/t on the London Metals Exchange (LME). This was more than double its closing price of US$42,995/t from the previous day. The sudden price movement saw the LME suspend trading of the contract.

For benchmarking purposes, a closing price continued to be released every day but did not reflect actual market conditions. It was not until the 16th of March that trading of the nickel contract resumed, when almost immediately a hiccup in the IT system caused yet another suspension between 08:00 and 14:00 as some companies were able to set prices beyond imposed price bands—contracts signed at those prices were voided.



What Triggered the Collapse

The underlying cause of the dramatic price movement was caused more by geo-political uncertainty and financial manoeuvring than actual acute physical supply uncertainty. The conflict between Russia and Ukraine placed a grim outlook for nickel, with Russia being one of the world’s top suppliers.

In 2021, Russia was the world’s third largest supplier of mined nickel with a total production of 250kt. Further, Russia is also responsible for 17% of the globe’s class 1 nickel, which is a high purity nickel of at least 99.8% grade that is used in batteries. The majority of this comes from Nornickel (formerly Norilsk Nickel), who not only supplies nickel but also a large volume of PGMs to the market.

While sanctions have not been placed directly on base metals, the announcement of the expulsion of Russia from financial transaction service SWIFT as well as other restrictions have caused Western companies to self-sanction and, if possible, avoid Russian imports. The unknown impact and extent of possible sanctions was the first major factor that threw a lot of immediate confusion and insecurities for future nickel supply.



Another source of insecurity was the continued dwindling volume of nickel left in stock. As of March 2022, only 72.5kt of nickel was reported in LME stockpiles, though the Class 1 nickel the index tracks only accounts for a relatively small segment of the market.

The apparent final straw for the nickel price, sending the market over the edge were the short bets made by Tsingshan Group—the world’s largest nickel and stainless-steel producer. The company has a history of taking short positions on nickel futures on the LME, anticipating the nickel price will go down. In rushing to cover these shorts by purchasing contracts, Tsingshan and other traders caused a surge in nickel prices.

The company was left with an outstanding short position of approximately US$8bn (~100kt of nickel), which would have to be paid off either in cash or physical deliveries. Making physical delivery would be difficult as the LME only accepts class 1 nickel against its contracts in the form of cathode, plates and briquettes, while Tsingshan mainly produces low grade nickel pig iron for its stainless-steel mills. The company released a statement stating they had reached a standstill arrangement with hedge bank creditors until they could arrange financing to settle its outstanding margin calls.


The Aftermath

When nickel trading resumed on the 16th of March, more than a week after the suspension, a 5% pricing limit was implemented either side of the closing price of the previous day. This pricing band was gradually relaxed to 15% as market conditions stabilised.

When the daily closing price reached either the upper limit or lower limit, it was classified as a price disruption event, this happened for six days before market fluctuations eventually subsided. Pricing of the metal over the last week of March suggests nickel settled at a short-term equilibrium between US$30,000 and US$35,000/t, but how long this lasts remains to be seen.

Off the exchange floor, traders are struggling to place a price on the metal. The LME price has historically been used as the benchmark for physical settlements, yet the recent disruptions, their management and fallout, customers are walking away from contracts as they lose confidence in its representation of the market.

Further, during the period of trading suspension, deliveries were still being negotiated for companies who needed the physical metal, while at the same time it was agreed that the disrupted, frozen price was not an accurate reflection of the market and thus no new purchases were being made. Some producers were also already considering stopping production in the face of skyrocketing gas prices.

The UK’s Financial Conduct Authority and the Bank of England have announced that they will conduct an investigation of the events leading to the price suspension and evaluate LME’s approach in handling the trade suspension and resumption. The regulators are especially concerned about the level of transparency in the market. The LME itself has also announced that it would commission an independent party to carry out its own investigation, and that it welcomes any feedback that would help improve its market structure.

Unfortunately for the LME, this commotion has caused many to rethink the exchange’s role and importance in the metals trading market. Its continual reliance on the open outcry pit, in which traders negotiate by shouting and using hand signals, is believed to be an outdated method, even though the CEO of LME argues that this system in fact protects mining companies from outrageous fluctuations.

An alternative platform is the Shanghai Futures Exchange (SHFE). Following the events on the LME, nickel contract prices also increased by the maximum daily limit allowed on the SHFE for several consecutive days, leading to the suspension of over half of these contracts. Yet unlike the LME, trading quickly resumed due to the comparatively smaller volume of nickel trades that are processed on China’s primary exchange.

SHFE futures contracts are set to monthly instead of the three months that is used on the LME, while trading can take place for a minimum of one tonne of nickel compared to the LME’s six tonnes. Pricing limits on the SHFE are also restricted to a 4% difference from that of the previous day. However, apart from Chinese traders, only qualified foreign investors are allowed on the SHFE, and all trading is made in yuan. The application process can take several months for approval as international traders have to submit records of their previous credits and experience in the futures market.


Everything is Better at Home

As the global demand for environmentally friendly EVs continues to grow, so will nickel demand. Yet this price volatility, combined with recent geopolitical tensions from the Russia Ukraine conflict, have made many countries re-evaluate the security of their nickel imports.

For example, the Canadian government will be partnering with several companies including Electra, Glencore and Talon Metals to conduct a feasibility study on the construction of an integrated battery materials park in Ontario processing local resources. This initiative was proposed with the intent of reducing the carbon footprint of nickel by minimising transportation required between the mines and refineries, while also reducing Canada’s dependency on other countries as the whole supply chain becomes domestic.

The Australian government has also recently granted Ardea Resources’ Kalgoorlie nickel project a Major Project Status to fast-track its development and construction. Since Western Australia has been identified to contain several rich nickel sulphide deposits, allocating more funding into bringing these projects online would give Australia a secure source of domestic nickel supply.