LONDON, Sept 12 (Reuters) - The London Metal Exchange's
(LME) controversial suspension of its nickel contract in March
didn't just impact trading in London.
In the immediate aftermath of the LME intervention, the
Shanghai Futures Exchange (ShFE) was forced to suspend its
nickel contract for two days and has arguably suffered even
LME nickel volumes have unsurprisingly slumped since March
with activity in August down 47% on the same month last year.
But ShFE nickel volumes have fallen harder, collapsing 74%
year-on-year in August and dropping by 70% over the first eight
months of 2022.
Nickel activity in Shanghai is now back at levels last seen
in 2015 when the contract was first launched.
ShFE's response is to broaden the range of physical nickel
that can be delivered against its contract to include
The move would help address the Shanghai contract's
persistent problem of super-low inventory and align it more
closely with the LME product.
But it also risks stimulating competition for LME stocks,
which are overwhelmingly in the form of briquettes and already
The root problem is that both exchanges are competing for
physical liquidity in what is a shrinking part of the global
nickel supply chain.
ShFE first mooted the idea of including briquettes against
its contract in 2020. It's a form of nickel that has become more
widely traded in China in recent years, largely because it's a
popular choice for electric vehicle battery makers.
This year's market meltdown appears to have given the
proposal fresh impetus.
It's easy to forget that the short squeeze that caused the
London March mayhem was foreshadowed by rolling tightness in
Shanghai over the second half of last year.
Indeed, the resulting import-friendly arbitrage accentuated
a run on LME stocks, laying the foundations for the price
explosion that rocked the market in early March.
Persistent tightness in the Shanghai market is a function of
chronically low exchange inventory. It fell below the
10,000-tonne level in April last year and hasn't recovered
since, currently standing at a meagre 3,523 tonnes.
Physical liquidity on the Shanghai contract is constricted
by the fact that it only allows for delivery of full-plate
nickel cathode with a limited number of registered brands.
Other than China's domestic producers, only Russia's Norilsk
Nickel and Glencore's Norwegian Nikkelverk
brands are accepted.
Extending the delivery criteria to include briquettes looks
like an easy win-win of making the contract more useful for
domestic battery-nickel players and attracting more physical
units to ShFE warehouses.
The only problem is where that extra metal might come from.
OUT OF SHAPE
China doesn't produce much high-purity Class I nickel, most
of the country's production taking the form of nickel pig iron
for the stainless steel sector.
Briquettes have to be imported from Australia, Madagascar
and Canada or from the LME warehouse system, where briquettes
account for 87% of registered nickel stocks.
History provides a warning of what might happen if ShFE
changes its delivery criteria.
Low stocks liquidity plagued the Shanghai nickel market from
its launch in April 2015. Faced with the prospect of an
immediate squeeze on its new contract, ShFE included Norilsk
Nickel full-plate metal as a delivery option from June of that
In doing so, it generated a tectonic movement of
Norilsk-brand nickel from LME warehouses into China.
LME warehouses held over 267,000 tonnes of full-plate
nickel, accounting for 57% of total registered inventory, at the
start of June 2015. By the end of 2017 that stockpile had
dwindled to 71,340 tonnes, representing just 19% of registered
China's imports of refined nickel hit what remains an
all-time record high of 371,000 tonnes in 2016, including
228,000 tonnes of Russian origin metal
ShFE nickel stocks rose from 10,000 tonnes in the middle of
2015 to what also is still an all-time high of 112,000 tonnes in
September 2016. Since then the mountain has dwindled to next to
A similar shift in briquettes inventory can't be ruled out,
although there is simply not enough metal around to generate the
volumes seen in the 2016 migration of full-plate cathode.
LME nickel stocks fell by 147,000 tonnes last year and they
have halved again so far this year to 53,532 tonnes.
Although accentuated by the flow of refined metal to China
in the closing months of 2021, the underlying demand for LME
stocks has been coming from the battery sector.
The world is building ever more gigafactories and most of
them need refined nickel to feed into the metallurgical mix.
Availability of refined nickel is challenged and that of
briquette even more so.
Remaining physical stocks risk being split across two
trading venues, disrupting rather than enhancing pricing.
The core issue facing both exchanges is that Class I refined
nickel only accounts for around half of global production and
the ratio is falling all the time as Indonesia builds ever more
nickel matte capacity.
Tsingshan Group, which found itself at the centre of the
March storm, is a massive nickel producer but none of its output
is in a refined form that could be delivered against either the
London or Shanghai market. With no option of delivering
physically against its short position, its massive exposure
could only be resolved at eye-watering financial cost.
The limitations on what sort of nickel can be traded on the
London market played a key part in the market blow-up of 1988
when the LME also briefly suspended trading.
The problem was well understood even then but no-one could
agree on what would constitute a benchmark specification for a
product as chemically variable as ferronickel.
It remains to be seen whether the LME or ShFE can find a
pricing solution to what is an increasingly diverse product
spectrum, which now includes a fast-growing stream of nickel
Competing for a declining slice of the physical market may
not be the answer.
The opinions expressed here are those of the author, a
columnist for Reuters.
(Editing by Emelia Sithole-Matarise)