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Post: Commodities Corner: Nickel market tumult continues: What investors need to know

Like many other commodities, nickel became a victim of the supply concerns brought on by the Russia-Ukraine war, as a price spike on the London Metal Exchange earlier this month led to the suspension of trading in the metal for more than a week.

The LME suspended nickel trading on March 8 after prices for the metal more than doubled in a short span of time. While the exchange officially resumed nickel trading on Wednesday, it hasn’t yet been successful in bringing order to the market, with prices continuing to hit daily expanded price-limit declines for three days in a row.

Prices on an already tight nickel market had rallied over concerns from Russia, wrote Michael Widmer, commodity strategist at BofA Securities, in a note early this week. “This ultimately led to a short squeeze.”

What happened?

On March 8, nickel prices on the LME moved up significantly in a short period and the exchange said “it became clear that pricing in the early hours of trading did not reflect the underlying physical market and that the nickel market had become disorderly.”

Nickel had more than doubled, topping $100,000 per metric ton for the first time on record.

The LME, which referred to the events that day as “unprecedented,” then announced the suspension of trading in all nickel contracts, and canceled all trades executed on or after midnight local time.

The suspension and cancellations wiped out $3.9 billion in transactions, according to The Wall Street Journal.

At the time, the LME said all clearing members had met their margin requirements to the “LME Clear” in full. Margins are money investors must put up to be able to trade and hold futures contracts.

However, when the LME canceled nickel trades on March 8, Chinese nickel titan Tsingshan Holding Group owed its banks and brokers billions of dollars for margin payments related to its trades that day, The Wall Street Journal reported, citing people familiar with the talks between the lenders.

The LME said nickel trading would resume on March 16, with a 5% daily price limit in place.  However, once trading resumed, the three-month nickel price immediately fell 5%, and trading on LMEselect was halted, while trading continued on the interoffice and ring execution venues.

The price limit was then expanded to 8% for Thursday, which was promptly reached, and the LME expanded the limit again to 12% on Friday.

On Friday, the LME said nickel contracts traded in the ring again hit the limit down move.

Why did prices spike?

Russia’s invasion of Ukraine on Feb. 24 led to expectations for supply disruptions for a variety of commodities, including oil and metals.

Russia is among the world biggest exporters of oil and natural gas and the top exporter for wheat. It’s also among the biggest producers of palladium, gold, silver, copper and nickel.

Read: Commodities offer traders a wild ride, but some are drawn to volatility like flies ‘to a lightbulb’

Nickel is a metal that’s mainly used to make stainless steel and other alloys stronger. Nickel alloys are also used in making rechargeable batteries for portable computers, power tools and hybrid and electric vehicles, according to Geology.com.

Prices for the 3-month nickel contract were quoted at $41,945 per metric ton on Thursday, according to data on the LME.

What now?

Based on where nickel prices are in Shanghai, nickel may continue to fall until it trades between $25,000 to $30,000 per metric ton, Edward Meir, analyst at ED&F Man Capital Markets, told MarketWatch.

“This is a dislocation” in the market and the LME is trying to “steady the ship right now, and they’re doing the best they can,” he said.

Meanwhile, John Caruso, senior asset manager at RJO Futures, said that the limit-down moves means that traders can’t exit their long positions in nickel.

“I’m sure its in the ‘fine print’ from a legal standpoint, but this is just another example of a breach of social contract between the exchanges and investors, and further widens the gap between trust and mistrust on the whole,” said Caruso.   

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