London Metal Exchange CEO calls for more powers to intervene as nickel trading halt continues

Nickel prices jumped to record highs above US$100,000 a tonne on Tuesday. PHOTO: REUTERS

LONDON (REUTERS, BLOOMBERG) - The London Metal Exchange's (LME) chief executive called for it to have more powers to intervene, after it was forced to halt nickel trading for the first time since 1988 when prices spiralled out of control.

The exchange will not restart the trading of nickel contracts on Friday (March 11) as it had anticipated because the criteria for restarting have not been met, it said in a members' notice on Thursday.

Nickel prices jumped to record highs above US$100,000 (S$136,000) a tonne on Tuesday as China's Tsingshan Holding Group bought large amounts to reduce short bets on the metal, which is used to make stainless steel and electric vehicle batteries.

Many market veterans were shocked by the LME's decision to suspend nickel trading on Tuesday morning and cancel all the transactions from earlier in the day and some in the industry are reportedly deciding to walk away.

The LME is now trying to facilitate negotiations to net off long and short positions in order to reopen the market.

"This will be an important chapter in the LME's history," LME CEO Matt Chamberlain told Reuters on Wednesday.

"This situation is and has been difficult. I hope that there will be greater willingness to talk about whether the LME should have more powers to intervene at an earlier stage," Mr Chamberlain, who is due to leave the LME at the end of April, said of nickel.

The LME's shock move on nickel, which also includes giving members extensions to deadlines to meet delivery obligations, marks the biggest crisis in decades for the 145-year old market.

It has been walking a fine line between proponents of a more hands off LME, owned by Hong Kong Exchanges and Clearing (HKEx), and those seeking more rules to create stability.

"We have seen some systemic contagion in the nickel market," Mr Chamberlain said, adding there were no issues with the stability of the LME operation or that of its clearing house LME Clear.

Asked why the LME did not let the market stay open, as the CME did in April 2020, when oil prices fell below zero, Mr Chamberlain said margin calls "simply couldn't be met by a number of our smaller members".

"This was not in the interests of the LME," he added.

The exchange added that it is working on appropriate operational procedures for a safe reopening, which includes, in particular, price bands, both for nickel and for all other physically deliverable contracts.

But fund managers, such as Mr Luke Sadrian, are walking away from the exchange, citing high risks.

"The LME has been my bread and butter for a very long time, so it's heartbreaking," said Mr Sadrian, whose Commodities World Capital fund is up about 120 per cent this year. "Given the current uncertainty, I am exiting all of my LME positions, despite being ragingly bullish on copper."

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The skyrocketing prices had left brokers and clients facing huge margin calls against loss-making positions. Prices more than doubled during Asian trading hours on Tuesday, before the LME suspended the market and said the day's trades - worth about US$3.9 billion according to Bloomberg calculations - would be cancelled.

By voiding the transactions, the LME effectively bailed out bearish position-holders at the expense of their bullish counterparts on the other side of the trade.

What's more, it caused havoc for traders who had been active in the small hours of Tuesday morning. Some sold long positions at a profit, only to have the sale cancelled; some placed relative value bets on nickel versus other metals, only to have the nickel part of the trade cancelled; and some banks used the exchange to hedge positions with their clients, only to have the hedges torn up.

"The LME market was open and bona fide users agreed bona fide contracts, they should be able to rely on them," said Mr David Lilley, a co-founder of the Red Kite metals fund who now runs Drakewood Capital Management. "It is the whole purpose of a regulated exchange."

But the LME has also won praise from others for putting the brakes on an unprecedented price spike that left nickel consumers such as steel mills reeling.

"I think the exchange was absolutely right to halt trading," said Mr Mark Hansen, CEO of physical commodities trader Concord Resources. "Everyone has a stake in an orderly, functioning market, and we've already seen as a result of this move in nickel that consumers are closing steel plants or liquidating inventories."

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