The Invisible War — Mourning of Nickel in the Global Financial Derivatives Market
“It’s coming towards us!” “They once again had us! I’m so sick of the international capital groups! They are the modern vampire!” “It’s a revenge move in response to our neutral position taking of the Russia — Ukraine War!” …
On March 9th, a few hours after the sudden and extreme turbulence in the global nickel market, Douyin (Chinese TikTok) bombed me with thousands of such notifications and contents indicating an evil conspiracy behind the atypical price rising of nickel in the global market. One day later, a “twist” came out.
“…ah ha! The prayer turned out to be the actual hunter!” “Trap in a trap! Have some wisdom bullet international speculators!”
Wait, hold on, what is going on here? Nickel, derivatives, Chinese company, international capital, war in Ukraine? I’m lost.
Phase I: The outburst of crisis
The story begins in London Metal Exchange (LME) on March 7th. Glencore, one of the world’s largest integrated producers and marketers of commodities, madly took long position in the nickel market, causing the price went skyrocket and once sent nickel to a record of high of more than $100,000 per ton on Tuesday. What does the shocking number mean? Well, under a rough calculation, it’s like the value of a dollar coin (8.33% Ni) is now worthy of $18 dollar.
On the other hand, the counterparty, Chinese tycoon Tsingshan Holding Group Co., the world’s largest nickel producer, with massive short positions held must make a quick decision of whether unwind a huge wager that could potentially generate millions of dollars’ loss. Moreover, JPMorgan, Standard Chartered and BNP as well as a unit of state-owned China Construction Bank Corp. are all involved in as brokers who will face potential several billion dollars in unpaid margin if the meltdown could not be stopped.
So, how does the mechanism work? Tsingshan, as the largest nickel producer in the world and the largest seller of nickel products, takes a short position in nickel futures in order to hedge the downside risk of future nickel price. Such moves need well-balanced risk management and precise execution to avoid “short squeeze” from the market. However, Tsingshan’s inventory data shows that it only has enough nickel matte (An intermediate product in the metallurgical processes with a nickel content varying between 30–60%) and lack nickel plate (99.96% pure nickel sheet Ni metal thin plate). For delivery purpose, if all the futures contracts were executed in LME, the underlying metal requires nickel of 99.80% purity(minimum).
In other words, Tsingshan doesn’t have enough nickel goods that meet the delivery requirement.
The rules and regulation of LME would then require Tsingshan to add more margin as a protective move of the latent default, over 80 million dollars’ loss could occur.
Also, the on-going war between Russia and Ukraine and the punishing sanctions imposed by the West, has reverberated through the financial markets. Russia is a major supplier of nickel plate, which was already in short supply due to increasing demand for electric-vehicle batteries and other industrial uses. Tsingshan has trouble getting enough nickel plate from its Russia business partners in a short period of time.
The major counterparty of Tsingshan, in this case, Glencore, an Anglo-Swiss multinational commodity trading and mining company with headquarters in Baar, Switzerland, was founded by the legendary Marc Rich in 1974, and later merged with Xstrata in 2013. It ranks 415th on Forbes Global 2000 in 2021. Marc was indicted in the United States on federal charges of tax evasion, wire fraud, racketeering, and making oil deals with Iran during the Iran hostage crisis. He fled to Switzerland at the time of the indictment and never returned to the United States. He received a widely criticized presidential pardon from U.S. President Bill Clinton on January 20, 2001, Clinton’s last day in office; Marc’s ex-wife Denise had made large donations to the Democratic Party. It seems that Glencore has inextricable link to Washington, yet Marc Rich passed away in 2013.
An interesting way to discuss the nickel trade issue is to interpret why the social media in China fiercely responded to such a specific business event. A lot of Chinese TikTokers uploaded their videos via the platform criticizing and cursing the West capitals targeted on another Chinese company once again. And some of them intentionally or unintentionally relate this event to Sinopec Unit’s trading loss in 2018. Unipec, a trading arm of Beijing-based Sinopec has suspended two leading officials and launched a risk management probe after suffering losses on oil transactions due to falling commodity prices. Although denied by Goldman Sachs, many people believed that the US investment banks had involved in loss-making crude oil deals at Sinopec. I notice that a lot of TikTokers has gained a lot of new fans and attentions by supporting Tsingshan and criticizing Glencore and whatever West capital behind that. The comment sections also showed some consistency, too.
Phase II: Twist or not?
On March 8th, when traders on the LME went crazy and nickel prices almost doubled. China’s Tsingshan Holding faced a $1 billion-or-so margin call that exchange officials feared it couldn’t meet. Rather than let it fail, which would probably have taken down several of the smaller LME brokers that had serviced Tsingshan. Controversially, LME decided to cancel all that day’s trading, more than 9,000 trades worth about $4 billion, and suspended trading for multiple days. LME offered explanation and further information regarding suspension and cancellation of trades in the interests of market stability and integrity. As the world’s largest market in standardized forward contracts, futures contracts and options on base metals, LME decided to intervene the Nickel Market under its monitor for the first time in three decades. It gained several criticisms for moral hazard, yet it did protect many small brokers from the crisis and support the stability of nickel market to cease its unusual volatility.
Two opposite opinions were active on discussion. On Douyin, China’s TikTokers attribute the decision made by LME to its ownership related to Hong Kong Exchanges and Clearing, suggesting the China’s government support for Tsingshan. This has become the most convincing evidence of a terrible moral hazard exposure. Like the old saying goes, controversy generates topics and profits. The discussions on LME’s ownership and its standing are pure nonsense. LME is acting as the trading house in this nickel crisis, and like any other clearing house, is doing its own duty to secure the market stability. And those who link the specific business event to some indications behind the war between Russia and Ukraine definitely prefer some controversies.
Phase III: Let the bullet fly a bit longer
Besides fiery discussions and speculations, it seems that all the involved parties are sitting around the table to find a way out. On March 13th, Tsingshan announces that by exchanging its nickel matte for nickel plate in the market, it has sufficient nickel plate for delivery purpose. If there’s no bluffing here, the problems now come to Glencore for a total payment of about $US 10 billion. If Tsingshan made such announcement for stalling, the default risk may include a transferring 60% stake in a nickel mine in Indonesia owned by Tsingshan to malicious short-sold foreign capital as collateral. Whatever the case is, JPMorgan is leading talks to contain nickel crisis damage. On March 14th, LME decided to reopen the market after Tsingshan on Monday reached a provisional deal with banks including JPMorgan Chase & Co., Standard Chartered PLC and BNP Paribas SA, which have agreed not to close out Tsingshan’s trading positions or impose further margin calls on the company. The standstill agreement buys the lenders and Tsingshan time to work out the terms of a secured lending facility that would allow the Chinese producer to pay the group several billion dollars it owes them for nickel trades.
The game is yet far from over, and it’s too soon to announce the winner.
But one thing for sure, many financial analysts and TikTokers seem to be the biggest winner so far.
- Charles
