The surge in global nickel prices in the past few days in trading on the London Metal Exchange LME), the world’s key metal market, looks like it has claimed a big victim in the shape of a company that is not only a major Chinese metal processor but also a big player in world markets for the key renewables battery metal.
A combination of the surge in prices on Monday and Tuesday especially and these limits seem to have been the final straw for Tsingshan Holding Group, China’s biggest nickel processor, which is now facing billions of dollars in trading losses after the unprecedented surge in prices in the past week or so, culminating with this week’s enormous rise.
The LME suspended trading in nickel Tuesday morning after the more than doubling in price in the first hour or so of trading. That was after imposing trading limits on Friday which came into force on Tuesday that put an effective lid on short term price movements (compared with future prices) and stretched out metal deliveries to maintain enough metal in supply warehouses.
Complicating matters is that the LME is owned by the same company which owns the Hong Kong Stock Exchange which is now firmly under the control of the mainland government. With the government of Xi Jinping anxious to avoid bailing out companies (except in property), a lot of pressure will be directed at the lME’s parent to do a deal to ease the pressures on Tsingshan.
Australia is a major supplier of nickel- BHP, IGO, Glencore, Mincor, First Quantum of Canada, Western Areas, Poseidon Nickel, Nickel Mines (Indonesian-focused) and Panaromic Resources, plus a handful of smaller hopefuls and the price chaos will disrupt their sales unless resolved quickly.
Bloomberg report that the company was looking at a paper loss stood at $US8 billion on Monday, even before Tuesday morning’s nickel price surge to more than $US101,000 a tonne saw the LME to suspend trading in the metal.
Chinese media outlets reported the $US8 billion loss earlier Tuesday. Traders said the company losses flowed from an attempt to engineer a short squeeze late last that that has blown up the market and the company.
Bloomberg reported that Tsingshan’s founder, Xiang Guangda, told a Chinese media outlet that “there have been some moves by foreigners,” and that it is in active negotiations with relevant parties, without specifying who they were and what was being negotiated.
Mr. Xiang was also quoted saying that “relevant government departments and leaders are all very supportive of Tsingshan. Tsingshan is a solid Chinese enterprise and our positions and operations do not have problems,” according to the report in Yicai, a financial-news outlet.
The company is privately owned and has been a major force for change in the nickel/renewables sector in recent years. It reportedly had revenue of $US19 billion in 2021, but there are no available profit figures.
it is based in the Chinese city of Wenzhou and owns production plants in Indonesia, India and Zimbabwe. Several years ago it started producing large volumes of a low-cost material known as nickel-pig iron, which pushed world nickel prices sharply lower.
It has also pushed deeply into the electric-vehicle industry, supplying large volumes of nickel matte to EV battery manufacturers in China and elsewhere. T
Bloomberg and Reuters both pointed out that the company is a well-known hedger, using forward contracts to protect its daily cash flows and profits. The reported huge loss it is facing on paper could be offset to varying degrees by profits on the metal it produces which have been forward sold.
Reuters reported on Tuesday that Tsingshan Holding Group had “bought large amounts of nickel to reduce its short bets on the metal and its exposure to costly margin calls, turbocharging a record rally fuelled by the conflict in Ukraine, three sources familiar with the matter said.”
Reuters said “Tsingshan started building a short position — a wager that prices will fall — in the nickel market last year.”
The big price rises on Monday (61%) and Tuesday (over 100% before suspension, took the rise in nickel prices so far in 2022 to more than 400% and Reuters said these big price moves exacerbated the pressure on holders of big short positions, already facing calls to increase their margin collateral by depositing extra funds with clearing houses (who hold the money for the brokers, sellers and buyers).
“Tsingshan, a privately-held company, and other ‘shorts’ faced larger margin calls on their short positions after the LME raised the amount of money companies had to deposit with it to cover their exposure to falling nickel prices, Reuters reported “three sources” as telling it.
“One of the sources said Tsingshan’s bets on lower nickel prices had amounted to around 300,000 tonnes at an average price between $US18,000 and $US19,000 a tonne. Prices for the metal, used in stainless steel and electric vehicle batteries, were last in that range in December.”
The price surge this week would have destroyed that position completely unless the Chinese company could find hundreds of millions of dollars in extra margin call collateral.
Reuters explained the cost of the lift in margin requirements (that would have started at Tuesday’s close of business) by 12.5% to $US2.250 a tonne.
“At $2,250 a tonne, the capital required on 300,000 tonnes (the size of Tsingshan’s position) of nickel would be $US675 million, according to Reuters.
That alone would have made the Chinese company blink, but the other change – to allow traders to defer delivery obligations on all its main contracts — including nickel — added to the pressures because it could no longer enforce its short squeeze by insisting sellers deliver the metal. They would have been forced to bid up prices to get the metal and/or go broke in doing so.
It has happened in the past when the International Tin Cartel collapsed in 1985-86 and trading in that metal was suspended while the situation sorted itself out.
This sounds very much like a lawyers’ feast in the making.
