The London Metal Exchange was forced to suspend the trading of nickel yesterday (March 8) after prices for the metal surged some 250% in just over 24 hours.
Prices for nickel, used in stainless steel and electric vehicle batteries, had already been rising in recent weeks due to concerns over supply disruptions stemming from the Russia-Ukraine war. A short squeeze pushed prices into a self-reinforcing upward spiral, hitting $100,000 a ton yesterday from $25,000 just a week ago.
One company faces $8 billion dollars in trading losses based on Monday’s closing price of $48,000, according to the Wall Street Journal. That is the Chinese nickel giant Tsingshan Holding Group, the world’s biggest nickel producer.
What is a short squeeze?
Readers might remember the meteoric rise of GameStop stock last year, which was similarly fueled by a short squeeze. Short-selling, as our colleagues explained at the time, works like this:
The short investor borrows a stock, let’s say at $10, and sells it. When the stock price drops to $5 the next week, they buy the shares back, return them, and pocket a $5 profit. If the stock instead rises to $15, the short investor either closes the trade for a $5 loss, or pays more interest to keep the trade open. For short-sellers, the risk can be immense—there’s no ceiling on how high a stock can soar, meaning their losses can climb indefinitely.
Investing aficionados on Reddit’s r/WallStreetBets channel then figured out that hedge funds that were shorting GameStop were vulnerable to a short squeeze, our colleagues wrote. That is, “as long as buyers can keep the price of the stock rising, short-sellers would eventually be forced to buy GameStop shares to contain the damage. When hedge funds do this (called “short covering”), that provides another uplift for stock prices.”
A similar dynamic has now played out in the nickel market.
Chinese nickel giant Tsingshan’s hedge backfired
Commodities companies of course generally benefit from higher prices for their products. But to hedge against a a drop in prices, they use forward contracts to lock in a price to deliver the commodity at a future date. As prices surged amid fears of supply disruptions from Russia, which accounts for 9% of global production (pdf), traders who were shorting nickel—i.e., betting on nickel prices to fall—rushed to close out their positions.
That included Tsingshan, which had accumulated a large short position through its forward contracts. But the rush to buy back loss-making contracts in turn pushed up prices more. At the same time, as the trading positions accumulated losses on paper, the company faced margin calls, or requests to deposit extra money or securities with brokers as collateral.
Tsingshan’s founder, Xiang Guangda, told Chinese outlet Yicai that “there have indeed been some actions by foreigners” and that negotiations were actively ongoing, without providing further detail. He insisted that the company has no issues with its operations and trading positions. The Yicai article has since been taken down.
Bloomberg reported that on Wednesday Tsingshan secured new loans and credit lines from lenders including JPMorgan and China Construction Bank to help address the liquidity issue caused by the margin calls.
When will nickel trading resume?
The LME canceled Tuesday’s trades and said it was too soon to set a firm date for resuming trading, but it was unlikely to happen before Friday (March 11). The exchange said that it is examining whether it’s possible to square some long and short positions against one another before restarting trade. Otherwise, more efforts to exit from short positions could again drive prices up on reopening.