* August's LME nickel volumes up 31% y/y, down 35% from Aug 2021

* LME nickel contract is responding to fundamentals - fund

* Many brokers remain wary despite improved liquidity

* Low stocks, fragmentation of the global market remain a problem

LONDON, Oct 6 (Reuters) - London Metal Exchange nickel contract volumes are improving but remain significantly below levels seen early last year before a trading crisis sank interest in the benchmark and a full recovery is still some way off, metal broking sources said.

On March 8, 2022, the nickel price doubled in disorderly trade to a record above $100,000 a metric ton as traders cut short positions - bets on lower prices of the metal - and producers reversed their hedges or forward sales.

In response, the LME, the world's largest and oldest metals forum, suspended nickel trading for the first time since 1988 and cancelled all nickel trades on that day.

Trading was chaotic when the market reopened on March 16 and many users fearing price volatility stopped using the contract.

Asian hours trading remained suspended until March this year, but since its resumption more people are dipping their toes back into the market helping liquidity.

"It's easier to trade now, we can see the nickel contract is responding to fundamentals, Chinese data and macro elements," a portfolio manager at a commodities-focused fund said.

LME nickel prices at around $18,450 per metric ton are down 38% so far this year due to surpluses created mainly by Indonesia ramping up production.

Average daily volumes (ADV) for the benchmark nickel contract on the exchange's electronic system rose to 18,115 tons in August, the highest since March 2022 when the number was 25,862 tons.

Overall average daily volume for nickel futures and options totalled 266,922 tons in August 2023, up 31% from August 2022 and down 35% from August 2021.


Despite the improvement, many brokers remain wary.

"We still have a bit of a love-and-hate relationship with the contract," a metals broker said. "We trade it because our clients ask us to, but I don't wake up in the morning and think how can I get ten new nickel clients."

Part of the problem for liquidity is low stocks in LME-approved warehouses , which the LME is trying to resolve with a quicker approval process for nickel brands that can be delivered against the LME's contract.

The exchange has so far approved one new Chinese brand and received an application from another Chinese producer. It expects more producers to apply to have their brands approved.

Fragmentation of the global market due to the production of different grades and shapes is also a major issue.

Nickel that can be delivered against the LME contract, known as "Class 1", amounts to only around 18% of global supplies, while lower grade, "Class 2" nickel pig iron (NPI) produced in Indonesia dominates the market with a 51% share.

The LME said that it stands ready to launch "Class 2" contracts should the market desire such products, but the feedback from market participants "strongly suggests limited appetite."

Attempts are also being made to launch alternative nickel futures or price indexes. Some plans have seen lengthy delays but are gaining traction. "You might be using LME prices in your contracts, but you will be keeping an eye on what's going on ShFE (the Shanghai Futures Exchange) and CME," the head of a metals trading desk said. (Reporting by Polina Devitt and Pratima Desai; editing by Veronica Brown and Sharon Singleton)