INSUBCONTINENT EXCLUSIVE:
For participants in commodities exchanges, a price rally is not necessarily good news.It was 5:42 a.m
on March 8 in London when the nickel market broke
At that time of day, bleary-eyed traders are typically just glancing at prices as they swig coffee on their way to the office.On this day,
however, metal traders across the city were glued to a screen, watching the price action on the electronic market, which was already open to
accommodate Asian trading
Nickel prices usually move a few hundred dollars per ton in a day
For most of the past decade, they'd traded between $10,000 and $20,000.Yet the day before, the market had started to unravel, with prices
rising by a stunning 66% to $48,078
Now, the traders watched with a mixture of horror and grim fascination as the price went vertical
Already at an all-time high by 5:42 a.m., it lurched higher in stomach-churning leaps, soaring $30,000 in a matter of minutes
Just after 6 a.m., the price of nickel passed $100,000 a ton.For participants in commodities exchanges, a price rally is not necessarily
And when those wagers move violently in the opposite direction, they can be hit with huge margin calls, or requests to put down more cash to
The head of one London metals brokerage recalls feeling sick as he watched the moves, realizing what the spike in prices would mean for his
company, the market, and the global metals industry
24 hours plunged the industry into chaos, triggering billions of dollars in losses for traders who bet the wrong way and leading the London
Metal Exchange to suspend trading for the first time in three decades
It marked the first major market failure since Russia's invasion of Ukraine jolted global markets, showing how the removal of one of the
world's largest exporters of resources from the financial system in the space of weeks is having ripple effects across the world.The spike
was driven in large part by a short squeeze centered on Chinese tycoon Xiang Guangda, who had amassed a big wager that nickel prices would
fall through his company Tsingshan Holding Group Co
On Monday, a week after trading had been suspended, Tsingshan announced a standstill agreement from JPMorgan Chase - Co
and other banks that would allow it to maintain its short position
The LME said nickel trading would resume on Wednesday.In a squeeze, rising prices put traders betting on a drop in an ever-tougher financial
position, forcing them or brokers and banks doing business on their behalf to buy the asset, a trade known as short covering that can drive
Others in the market may also push up prices in anticipation of that short covering
The wild rise of nickel drew comparisons to the short squeezes in meme stocks such as GameStop Corp
that gripped retail investors for much of last year.The difference is that nickel is a commodity that touches the entire global economy
The metal is found in all our homes as a key ingredient of stainless steel
It's also one of the most important raw materials needed in making batteries for electric vehicles
last year, when nickel, like all commodities, was rallying from its Covid-era low
Xiang didn't believe the rally would last
He started increasing his short position on the London Metal Exchange
The LME's history dates back to the early 19th century, when metal traders drew a circle in the sawdust on the floor of the Jerusalem Coffee
House in the City of London
Today, in addition to its electronic market, it's one of the last exchanges where brokers still gather in person to yell orders at one
another for part of the day
Its participants are a mix of the industrial metals companies, which tap the market to offset their price risks, and hedge funds, which use
Still, contracts on the LME are backed by physical metal in a network of warehouses around the world, providing a direct link with the
real-world metals industry.Traders, brokers, and clerks at the London Metal Exchange
(Image source: Bloomberg)Xiang isn't just a financial trader making paper bets on price moves
He's in the physical nickel business
Born in 1958, he started out making frames for car doors and windows in Wenzhou, in eastern China
He went on to pioneer new methods for producing nickel and stainless steel that upended the markets and made his Tsingshan the world's
hesitate to bet big on his visions for the future
(This account of events in the nickel market is based on dozens of interviews with people involved, many of whom requested anonymity because
the matters are private.)Why bet against nickel when you have a nickel business? Xiang wanted to increase Tsingshan's production
dramatically by producing so-called nickel matte for electric vehicle batteries
The company had plans to produce 850,000 tons of nickel in 2022, an increase of 40% in a year, according to a person briefed on them
While few observers believed Xiang could reach that level of production, he was confident
But the obvious consequence of so much nickel hitting the market, he believed, would be a fall in its price.Not everyone shared his
Some hedge funds were buying nickel contracts in a bet on the electric vehicle boom
The giant commodity trader Glencore Plc also had a position on the LME that would benefit from rising prices
By early this year, it had taken ownership of more than half of the available nickel in LME warehouses
For a while, it was unclear which view of the market would prevail
While Russia's nickel exports haven't been targeted by sanctions, U.S
and European buyers have nonetheless sought alternatives to Russian sources.Nickel's price moved sharply higher in the week after Russia's
For Xiang's big short position, that was painful
Remember, when prices move up, traders like Xiang who have sold futures contracts face margin calls; they must put up more cash to cover
potential losses.While investors who sell stocks short want the price to drop, in commodity markets many producers, traders, and users take
short positions as a hedge against losses on the physical commodities they hold in inventories
meet their margin calls.It's not clear to what extent Xiang saw his position as merely a hedge or as a speculative bet
The annals of commodity markets are full of tales of producers and traders, from Metallgesellschaft to Sumitomo, that blurred the lines
between hedging and speculation and ended with billions of dollars in losses.In late February and early March, Tsingshan, which had sales of
352 billion yuan ($56 billion) last year, paid its margin calls on time
Then on March 7, nickel's price began its parabolic ascent, surging from $30,000 a ton to more than $50,000
LME brokers and their clients were hit with margin call after margin call
Several large brokers got margin calls of close to $1 billion each over the course of the day.Tsingshan's were even larger, numbering
a portion of the bet in previous weeks, was over 150,000 tons
The company paid at least some of its margin calls early on Monday, according to a person familiar with the matter
But its obligations dwarfed its available cash and bank credit
As the price rose through the London day after offices in Asia had closed, Tsingshan started struggling to pay, the people say.That put
Tsingshan's banks and brokers, which include JPMorgan Chase, BNP Paribas, and Standard Chartered, in a bind
They had offset their deals with Tsingshan by placing their own short positions on the LME
Now they had to pay big margin calls on the exchange while receiving no margin from their client
Some started hurrying to buy back nickel contracts, sending the price of nickel spiraling ever higher
It was a classic short squeeze, as the pain for Tsingshan, its brokers, and other shorts created a self-reinforcing cycle.By now, the entire
nickel industry was in crisis
They held a hurried call on Monday evening, but decided to allow the nickel market to continue trading.At 1 a.m
on Tuesday, the market opened
Matthew Chamberlain, the LME's chief executive officer, had stayed up to watch
Things seemed calm at first: Prices were hovering around $50,000 a ton, and he went to bed
He was awakened by a phone call at 5:30 a.m
The nickel market was anything but calm
Worse, the chaos was spreading to other markets: Zinc prices spiked 15% in a few minutes to a record high, only to collapse again.The LME's
special committee held another call at about 6 a.m
Now they recognized that they had to suspend trading
At 8:15 a.m., the screens stopped flashing, hours before the in-person pit trading session was even set to begin
The price was frozen, below the record high but still at $80,000 a ton
Soon Chamberlain and other executives at the exchange began receiving frantic phone calls from LME brokers.By now, Tsingshan wasn't the only
Many producers, traders, and users of nickel with short positions on the LME were facing margin calls many times larger than they were
Browning, founding partner of brokerage Bands Financial Ltd
and a former LME board member.At the current price of nickel, the brokers themselves wouldn't be able to pay their margin calls, they told
Four or five of the brokerages that are LME members would have failed, a shock that could have devastated the global metals industry
doubt.The LME made a near-unprecedented decision
But it's extremely unusual for an exchange to cancel whole sessions of trading after the fact
Crucially, the decision meant traders wouldn't need to pay margin calls on the basis of the $80,000 nickel price
Effectively, it rewound the market to the moment when prices closed on Monday at $48,078.Even at that level, clients of LME brokers had
failed to pay some $500 million of margin calls in relation to their short positions on the exchange, according to a person familiar with
Tsingshan accounted for about half that amount
The company had a further 120,000 tons or more in short positions off the exchange, in bilateral deals with such banks as JPMorgan Chase -
and Standard Chartered Plc.The fallout was immediate
Investors who had booked trades during the chaotic session in the early hours of Tuesday were furious
Among them were some of the biggest names on Wall Street
Executives from Goldman Sachs Group Inc
voiced their displeasure at the decision on a call with Chamberlain
Executives at Tower Research Capital, one of Wall Street's oldest electronic market-makers, reined in its trading activity on the LME and
put its membership in the exchange under review.LME Chief Executive Officer Matthew Chamberlain
Cliff Asness, founder of AQR Capital Management, accused the LME, which was for more than a century owned by its members but in 2012 was
position has now racked up billions of dollars in losses
Undeterred, the Chinese tycoon has told banks he wants to maintain his position, and has asked them to keep funding him despite the losses
It's unclear whether he will get his way
One resolution to the situation may be for Glencore and Xiang to strike a deal to use Glencore's long positions to cancel out some of
Neither party seems very keen on this idea, however
The Chinese government may also play a role
Beijing is supportive of him, Xiang told contacts recently
One thing is sure: If Xiang can weather the storm, Tsingshan's nickel producing assets stand to benefit from the higher prices, offsetting
losses from the short.For the LME, the future is unclear
Some think this could herald the end of the exchange itself
Still, the LME has weathered numerous scandals before in its 145-year history, from a 1985 crisis in the tin market that caused many brokers
to go out of business to the incident when a trader at Sumitomo hid more than $2 billion in losses.Those past scandals forced reforms on the
Now, people familiar with the matter say, the exchange is likely to introduce such measures as position limits and greater transparency
Most market participants expect nickel prices to come back down once the crisis around Xiang's position has been resolved.But the effects of
the short squeeze are likely to be felt in other ways
Some aggrieved traders are already preparing to take legal action against the exchange
There are also traders making plans to abandon the LME nickel contract, a move that would reduce market liquidity, making it harder for
everyone from miners to car companies to manage their exposure to prices and access financing.Hansen of Concord Resources argues that
financial investors who traded nickel last week should have been prepared for the LME to step in
Then, as now, a key factor was the intervention of the exchange
