15 March 2022

London Metal Exchange

On the 10th of March I wrote in passing about the 250% rally in nickel causing a major margin call for a commodity billionaire (at the time). The story has grown significantly since I raised the alarm bells for wild commodity markets inflicting severe wounds on traders holding the other side of the trade.

For those new to derivative trading there is always 2 opposing parties to a derivative trade which is a contract made up from nothing other than one party thinking the underlying instrument will go up and the other party thinking it will go down. So we have as a case in point a zero sum game or said differently a winner and a loser. It’s always the case no other way unless the loser cannot pay the winner the spoils.

In the case of nickel on the 7th of March the market went up a crazy 66%, this was not the end this is when things started to go a little nuts.

At 5.42am on the 8th the market jumped $30,000 in a matter of minutes and just after 6am the price of nickel went past $100,000 a ton. Ouch a whopping 250% rally in 24hrs.

At this time Xiang Guangda called his butler for a change of underwear as his short of 150,000 tons left him with an $8 billion margin call.

It pays to have friends in high places, and it also helps when the banks who are financing you stand to lose a fortune so that it also becomes their problem. The first tactic to employ was to shut down the exchange. The exchange is owned by Hong Kong Exchange (read: friends of Xiang). The next tactic was seriously dodgy if you were a trader long the market.

The LME made a near-unprecedented decision. It decided to cancel all the trades that took place on Tuesday morning—$3.9 billion of them, according to a Bloomberg calculation. Exchanges sometimes cancel trades when technology glitches or “fat fingers” cause one-off mistakes. 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.

There was still around $500 million of margin call not settled with the LME.

The exchange is going to open on Wednesday this is my guess what is going to happen.

Xiang Guangda is the founder of the worlds largest producer of nickel, Tsingshan. He is known as Big Shot because of his confidence in making market calls. The reason why he went short the market was because he wanted to ramp up the production of nickel in 2022 by 40% to 850,000 tons.

If this guy can produce 850,000 tons of the stuff and is 130,000 tons short then he simply has a cash flow problem. I suspect the banks are going to come to the party and help him work through the issue. Remember if he is 130k short and can produce 850k tons then the 720k tons difference means he is sitting on the motherload of profits.

A lesson to us all if you are a Big Shot and you create a Big Problem then sometimes you have the ability to rig the game in your favour. I suspect Tsingshan is going to survive this squeeze and they are going to leave a cemetery of Small Shots. I fear the London Metal Exchange founded in the early 19th Century at the Jerusalem Coffee House in the City of London might survive but will not thrive post this debacle.

The discredited, Hong Kong-owned London Metals Exchange also announced that it would impose 15% limit on daily price moves across all metals – which will come in useful on Wednesday when nickel either explodes higher yet again in hopes of further squeezing Tsingshan, or crashes.

The exchange also said that it would require traders’ nickel positions to be reported going forward, something it should have thought of long ago.

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