LME nickel stocks low, return to Asian trading hours unlikely to spur recovery

"We believe that market confidence and trust in LME nickel prices is still shaken in the aftermath of March 2022's historic short squeeze, as evidenced by low nickel trading volumes and Chinese buyers' desire to find alternatives to LME nickel prices to underpin supply deals," said Jason Sappor, senior analyst of metals and mining research at Commodity Insights.

Echoes of the short squeeze

The LME's nickel market has been struggling with liquidity issues since 2021, when it became the "supplier of last resort" for the production of electric vehicle batteries in China, according to John Browning, managing director of Hong Kong-based futures broker BANDS Financial Ltd.

Pandemic-driven disruptions only made matters worse, Browning added. In addition, the events following Russia's invasion of Ukraine in February 2022 delivered a major blow to LME's nickel stocks.

Nickel prices started rising as buyers worried that sanctions would remove Russia's nickel supply from the market. When Tsingshan tried to cover a short position March 8, it sent prices unrealistically high for a physically traded commodity. The LME paused trading until finally opting to unwind deals made that day. In the months since, arbitrage traders exited the market, some angry over canceled trades, while others alleged the LME bailed out Tsingshan and lacked oversight on over-the-counter transactions.

There is still a substantial short position on the market today, Alastair Munro, an LME market commentator at brokerage Marex, told Commodity Insights.

The LME has implemented a slew of new rules in order to stabilize the market and regain investor trust, including limiting price movements to no more than 15% per day, requiring traders pay a fee to roll a short position and an increase to the initial trading margin.

The additional costs to traders have only inflamed the situation, analysts said.

"The LME trading costs are keeping potential nickel contract users out of the market, and have significantly reduced trading liquidity," Browning said.

Traders are being driven away by the higher cost of trading as well as the higher cost of borrowing money due to inflation. Traders are hesitant to use their funds to trade nickel.

"Borrowing money is so much more expensive for all of us. We can see that, we can smell it," Munro said. "But how does that impact nickel? Because holding nickel is the most expensive metal to hold."

Munro pointed to the volatility seen in the week ended March 24 as traders prepared for the possibility that the Fed would further increase the interest rate, while reacting to the possibility that a banking crisis could spread. The collapse of Silicon Valley Bank earlier in the month followed by the takeover of Credit Suisse alarmed some traders, though it appeared unlikely to directly affect miners.

"A lot of people are withdrawing and they're reducing risk amongst an uncertain geopolitical macro environment, coupled with some vicious intraday volatility," Munro said.

In addition, nickel activity on the LME has slowed as the EV market turns to buying refined class 2 nickel, which is not traded on the market, Jack Anderson, research manager at market intelligence provider Project Blue, told Commodity Insights.

There has been hope that the reinstatement of Asian trading hours would bring back arbitrage traders and additional nickel volumes. The additional volumes could strengthen the market and convince other traders to return as well. But analysts say expanding trading hours will not make traders overlook their concerns over systemic issues in the LME.

"Given that the LME-nickel saga remains ongoing and has continued to hurt confidence in the exchange's nickel price as a price discovery mechanism, we anticipate that Asian market participants will continue to be hesitant to resume trading on the exchange," Sappor said.

Browning suggested the LME "take more proactive steps to communicate how it has addressed past problems. How it will reduce the current excessive over-margination and how it will engage the market with how it plans to deal with a changing physical nickel market which is shifting to alternative grades."

The LME declined to comment on the topic.

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