Shanghai halts nickel contract trading after London Stock Exchange suspension

The global nickel market nearly came to a halt on Wednesday after rising prices prompted China’s main commodity exchange to freeze trading on some of its most active contracts.

The Shanghai Futures Exchange said it was suspending trading on more than half of nickel contracts traded in mainland China on Thursday after they rose by the maximum amount allowed for several days in a row.

At the start of Wednesday’s session, China’s benchmark SHFE nickel contract rose 17% to the equivalent of more than $42,000 a tonne after unprecedented moves in London brought stocks to a standstill. negotiations that should last until at least Monday, according to forecasts.

The sharp rise in prices forced a Chinese metals tycoon with a dominant market position to find more money to cover his bets that the market would fall, driving prices even higher.

The price of nickel, which is used in the batteries that power electric vehicles, started to rise in late 2021 as demand from automakers increased. It has accelerated in recent weeks amid fears that supplies from Russia would be disrupted after President Vladimir Putin ordered an invasion of Ukraine two weeks ago. Russia is the largest global producer of high quality nickel.

The Shanghai stock exchange had already seen “violent fluctuations” in foreign markets and imposed higher trading fees for the metal this week, trying to reduce volatility – urging market participants to “invest rationally and jointly maintain smooth market operations”. .

“[As autoridades da bolsa] see this as appropriate given the uncertainties presented by overseas markets – that it may be better to wait until overseas markets become more stable before relaunching,” said Bruce Pang, head of research at investment bank China Renaissance.

Pang added that while there were still some nickel contracts in Shanghai that could be traded in Thursday’s session, the message from regulators to any traders raising prices was clear: “Stop it, or we’ll stop you.”

Traders responded to the Shanghai trading freeze by immediately discarding any nickel futures that could still change hands once the night market began, plunging nearly all remaining contracts by the maximum amount allowed at the open.

The London Metal Exchange (LME) said nickel trading would not resume until at least next week – and even then it would have to impose emergency measures to ensure an orderly market. These measures include a 10% cap on nickel movements.

The LME is also studying a mechanism to reduce the large short position in the market before trading resumes. This would involve “compensating” large long and short positions.

On Tuesday, the 145-year-old exchange, which sets global prices for industrial metals, was forced to halt all nickel trading after prices doubled to a record high above $100,000. ) to ton.

The extraordinary rise in prices came as Xiang Guangda, the billionaire founder of China’s top stainless steel and nickel producer, Tsingshan Holding Group, was hit by margin calls and tried to make a wrong bet that nickel prices would fall by buying contracts from the LME

His purchase triggered a rise in prices which, in turn, fueled a flurry of margin calls – demands for extra cash to cover losses in futures – across the market. Many smaller holders of nickel contracts were then forced to buy back their positions, exacerbating the rise in prices.

Xiang told local media on Tuesday that Tsingshan had no problems with its nickel position or operations. Bloomberg reported on Wednesday that the company has secured loans from banks including JPMorgan and China Construction Bank to help meet its margin calls. Traders believe Xiang is potentially losing billions of dollars in paper.

Metal producers and large industrial consumers of raw materials use futures exchanges to price the commodities they are buying and selling. The suspension of nickel trading in London and Shanghai will send shock waves through global supply chains.

Matthew Chamberlain, the outgoing chief executive of the LME, defended the decision to suspend the negotiations, saying that some of its smaller members would struggle to continue operating.
However, brokerage executives and fund managers asked the LME to be more explicit about why it not only suspended trading but also canceled a large portion of what took place on Tuesday.

“Canceling trades between willing traders long after the fact is NOT OK,” wrote Clifford Asness, founder of AQR, one of the world’s largest hedge fund groups, on Twitter. “Suspending trading is one thing, but LME, please explain why people should continue trading with you if you can cancel your trades later for your own mysterious reasons?”

There is now concern of possible contagion in other futures markets. Overnight, ICE Clear Europe – the region’s largest commodities clearing house – said it would enforce higher margin requirements across a range of markets, from gas to coal.

Translated by Luiz Roberto M. Gonçalves