Why Nickel Prices are Shooting Up?

Nickel has recently entered the club of commodities whose price economics have been thrown into disarray as a consequence of the War. Nickel prices rose by 250% in just two days to briefly reach above $100,000 per tonne. This sort of “crazy” and “fundamentals-defying” behaviour led major exchanges in London and Shanghai to halt trading of the metal and cancel contracts temporarily.

This basically means that today there is no global trading and no price formation in Nickel, which is nothing short of unprecedented.

Now, we have seen prices of crude oil, gas, edible oil, wheat etc. shoot up over the past few weeks as an effect of the supply crunches created by the Russia-Ukraine War. But the price behaviour we observe in Nickel is different in two particular ways:

a. Nickel prices rose by a lot higher than the others.

b. Nickel prices have been on the rise for a while before the War even started.

Which means, the War isn’t the only thing driving this mad surge. Let’s see about all the factors in play here.

The Nickel-odeon Price Rise

Russia supplies a chunk (>6%) of the world’s total nickel. In fact, the Russian company Nornickel is the world’s biggest supplier of battery-grade nickel which makes up 15–20% of the entire global supply.

So, long story short, Russia invades Ukraine, shortage in nickel supply mounts and prices spike. But this wasn’t the beginning of the ongoing volatility. Prices of nickel have jumped more than 200% since the beginning of this year alone.

FIRST, one must remember that Nickel has a rising demand from the electric vehicle (EV) and steel industries. The metal has been a chief component in batteries for a long time, especially in nickel cadmium (NiCd) and the longer-lasting nickel metal hydride (NiMH) rechargeable batteries. The relatively-higher energy density and low-cost storage capacity of the metal is what makes it so lucrative for use in automobiles and that’s precisely what’s been padding its bull run for some time now.

Fun Fact: Most automakers use cathodes in their batteries which are made of 60% nickel. Tesla batteries, however, use cathodes made of 90% nickel.

SECOND, there’s a nickel supply boom that’s currently underway. So, Indonesia and the Philippines are the two biggest producers of nickel globally. But lately, there’s a growing trend of Chinese plants setting up operations in eastern Indonesia to turn low-grade Nickel ores into highly-processed EV components.

Okay let’s break this down. There are two major types of nickel deposits found globally. One, the high-grade Nickel Sulphide which has a higher purity and better industrial-grade efficiency (aka Class I nickel). But Class I deposits are scarce and mostly confined to a handful of locations, largely in Russia. In contrast, half of the world’s nickel comes from the less pure Nickel Laterite deposits (aka pig nickel or Class II nickel) which can be refined at the smelters.

Currently, there is heavy Chinese investment pouring into the pig nickel refining industry. Laterite nickel ores are processed for use in EV batteries. Due to this reason, the industry has been bullish on the metal for some time which is evidently also driving the latest price rally.

THIRD, nickel has had a history of erratic price behaviour. And this has to do with the nature of the metal itself. Most of the world’s metals are produced by relatively standardised methods which keeps their prices comparatively stable and predictable.

Nickel, on the other hand, goes through an array of different processing methods and end-use sectors that interact in unpredictable ways. This makes its price swings fairly frequent. For instance, nickel has experienced a 90-day volatility over the past 10 years which is markedly higher than any other traded metal on the London Metal Exchange (LME).

Now that we mentioned the LME, we must explain its role in the history of nickel’s disorderly price conduct.

“The Market of Last Resort”

That’s what the 145-year-old exchange calls itself even though the facts suggest otherwise.

LME launched nickel contracts back in 1979 and since then these contracts have often been criticised for being “illiquid”, “unrepresentative”, “open to manipulation” and “volatile”.

Here’s more context. Over the years, the LME has witnessed multiple nickel market crises. The common theme running through all such crises is a) low exchange stocks and, b) difficulties in delivering the physical metal against short positions.

Bear with me a little longer. There is a concept called physical delivery in options or futures contracts which requires the actual underlying asset to be delivered at a specified date. Problem here is that only a minority of nickel produced every year are used as deliverables against these contracts, particularly the ones in LME. So, LME nickel stocks represent only a small fraction of the metal’s world-wide production.

Now, nickel comes in multiple forms — pig, matte, ferronickel, nickel sulphate etc. All of these need to be price-hedged on the LME but none of them can be delivered because Nickel is actually a difficult commodity to deliver. Ultimately, what happens is that if you are a trader shorting nickel in the LME, then short squeezes are going to be a bigger-than-usual pain for you. Because, you’ll have to keep paying daily premiums on the short if you’re unable to deliver the physical metal as an exit route, which you can’t because, as stated, nickel stocks at the exchange run historically dry and they are difficult to move.

This is what happened to Xiang Guangda, a Chinese tycoon who built a massive short position in nickel futures and faced unprecedented losses following the recent price spikes.

If Only He Had a Nickel When Margin Called…

Xiang Guangda controls the world’s largest nickel producing company — Tsingshan Holding — and hence he is often called the “Big Shot” in Chinese commodity circles.

Xiang started building short positions in nickel late last year. Although his exact motivations are unknown, one can take a guess. It was possibly because Xiang wanted to hedge the rising output as he believed the nickel price rally would fade out this year.

Alas, his fate turned upside down as prices rose dramatically leaving him with a short position in the vicinity of 100,000 tons of nickel (possibly even more if intermediaries are counted). This means he would have suffered a daily loss of nearly $2bn at the highest point of surge.

Xiang and his company have been struggling to meet margin call payments for a while now. In fact, the state-owned China Construction Bank, one of Xiang’s brokers, failed to pay millions of dollars owed in margin calls on Monday.

But in an interesting twist of events, the LME, instead of putting the bank into default, raised its payment deadline. It has also shut down nickel trading since Tuesday to prevent any further superspikes. For those of us who are all too familiar with witnessing short squeezes, this is almost reminiscent of the events on Wall Street last year. LME shut down metal trading to fend off short squeezes for Xiang’s corporation much like how Robinhood restricted trading in GME when Melvin Capital got squeezed out of its pockets.

Strange how history repeats itself, particularly when market agencies continue to pick up after defaulting companies when margin called.

(Originally published March 11th 2022 in the TRANSFIN E-O-D Newsletter)