Enormous pressure on global commodity markets today and tonight as traders large and small watch what will be a big test of faith – can the London Metal Exchange restart trading in the nickel contract after a week of suspension to allow a big Chinese company to be bailed out from a multibillion dollar mistake?
But traders will again be watching the nickel contract on the London Metal Exchange where the LME plans to restart trading on Wednesday. That will end a week-long hiatus while the situation was sorted out.
Hundreds of companies large and small, including miners, brokers, traders, advisers of all types and majors like BHP, Vale (which owns the old Inco mines in Canada), Nickel Mines, Glencore, Western Areas and IGO will be watching to see how prices move.
They will be watching to see if a truce struck between the Chinese company at the centre of the trading debacle, Tsingshan Holding and its banks holds or whether it fails if there is another rapid price movement – almost certainly a fall initially.
Banks including JPMorgan Chase and Standard Chartered have agreed not to close out Tsingshan’s position or make further margin calls — demands for extra cash to cover losses.
The Financial Times reported that other bank counterparties to Tsingshan’s huge (and failed) bet on lower nickel prices are Chinese lenders ICBC and China Construction Bank which means the Chinese government has been involved in the talks.
The standstill agreement will give the two sides time to reach a deal on a new secured credit facility that the world’s biggest stainless-steel producer can use for its “nickel margin and settlement requirements”.
In a rare public statement, the privately owned company said an “integral feature” of the agreement was a “provision for the existing hedge positions to be reduced by the Tsingshan Group in a fair and orderly manner as abnormal market conditions subside”.
The LME suspended dealings in nickel last Tuesday and cancelled thousands of trades after its benchmark contract doubled to a record above $US100,000 a tonne, bringing global trading in the metal to a halt.
The LME plans to resume trading at 8am on Wednesday (London time) and will introduce daily price limits for all of its metals including nickel. Members will also be asked to disclose all Over the Counter positions in nickel greater than 100 lots until further notice.
“The LME notes in particular that a large client of the market has now published details relating to the support of a banking consortium, which could suggest that the potential for further disorderly conditions may be mitigated,” the exchange said in a statement, its third since the crisis emerged on Tuesday of last week.
The eruption of Covid might be both good and bad news for Tsingshan and its banks – the outbreak could see nickel prices fall, thereby lessening the size of the Chinese companies’ potential losses, but Covid could also trigger concerns that it could see a falloff in Chinese business activity and cut business for Tsingshan and therefore cashflows.
