Big Short keeps nickel market on edge a month after squeeze

While the fireworks have ended, the market has settled into something of a showdown. Xiang Guangda, the Chinese tycoon at the center of the contraction, is no longer facing giant margin calls. But he still has a sizeable bet on lower nickel prices, according to people familiar with the matter. While Xiang reduced his short position somewhat last month, he has since largely stopped covering the position due to a rise in prices, the people said.

And Xiang’s options to significantly reduce his position may be limited in the short term. Refined nickel metal, the type that must be delivered on the LME when short positions are held to maturity, is in short supply. In the derivatives market, there have been few signs so far that large long holders are willing to “offset” their positions against Xiang’s. Without an agreement to reduce his short positions, Xiang will simply have to keep rolling positions as they near expiration and wait for a drop in prices, which could leave the market stuck in limbo for an extended period of time.

“There is still a lot of nervousness and caution in the market,” Xiao Fu, head of commodity strategy at BOCI Global Commodities, said by phone from London. “Nickel is likely to remain highly volatile and due to geopolitical uncertainty and low liquidity, we will not see a return to normal anytime soon.”

The key reason prices spiked above $100,000 a tonne on March 8, in trading later canceled by the LME, was that Xiang’s Tsingshan Holding Group Co. was struggling to pay margin calls from its banks and brokers. That is no longer a factor, after Xiang reached a standstill agreement with its banks before the LME reopened the market.

Then, when a drop in prices below $30,000 a tonne triggered a flurry of nickel trading in mid-March, the company covered about 20% of its short position, according to people familiar with the matter. That helped fuel a recovery in prices to current levels of more than $33,000 a tonne, and Tsingshan has barely reduced its position since then, the people said.

That means Tsingshan still has a short position of more than 120,000 tonnes. Compared to total nickel stocks in LME warehouses of some 75,000 tonnes, it’s a position that’s easily still large enough to roil the market.

And the liquidity has all but disappeared, as banks and brokers seek to reduce their exposure. Despite prices, apart from the peak in early March, being at their highest level since 2008, the trading volume of the benchmark 3-month LME contract over the past week has been the lowest in more than a week. decade.

Tsingshan did not respond to multiple requests for comment.

The LME nickel price remains high relative to other parts of the nickel world. Nickel pig iron, a semi-processed form used to make stainless steel, has fallen to “unprecedented” discounts to the LME price, according to a recent note from Macquarie analysts including Jim Lennon.

Could the nickel market see a repeat of March’s contraction?

Possibly, but it wouldn’t be as dramatic or chaotic. For one thing, the LME has changed its rules to prevent the price from moving more than 15% in one day. On the other hand, Xiang’s dealings with his banks means he shouldn’t be pressured by margin calls in the same way. And another new LME rule means that anyone who has a short position that is pending delivery and cannot deliver it now can pay a fee to get it going.

But with the main LME contract for April due to trade as “cash” at the end of next week, one party still has a short position equivalent to more than 40% of the open positions on the contract, according to data from the LME. However, that number does not represent Tsingshan’s position, as the Chinese company has shifted most of its short positions from the April contract, the people said.

Even if April is uneventful, Tsingshan’s short position still hangs over the market. Tsingshan had paid his margin calls until March 4, when the price of nickel closed at $28,919 a tonne. That means your banks don’t need to give the company any credit to cover losses incurred on your position if you hedge around that price or less. On Friday, nickel was trading at about $33,720.

(By Jack Farchy, Alfred Cang and Mark Burton)

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