Chaos returns to the LME nickel market

Extreme price volatility returned to the nickel market on the London Metal Exchange (LME) in the past week as the after-effects of March's short squeeze and subsequent trading suspension continue to resonate, worsening trading conditions and causing widespread confusion among both buyers and sellers.

The three-month nickel contract surged on 14 November to briefly breach the $30,000/t mark, hitting the LME's daily trading limit of 15pc in the process. And while the official price settled back to $27,200/t later on, it jumped again by 9.17pc to $29,695/t the following day.

Spurious reports of a fire and explosion at an Indonesian nickel pig iron plant owned by Chinese lithium-ion battery cathode active material precursor manufacturer CNGR contributed to 14 November's price surge, while leakage in a tailings dam at consortium Prony Resources' Goro nickel mine were said to be supporting the price increase on 15 November.

But the overwhelming driver of the sudden price movement was the continuing thin liquidity that has plagued the LME nickel contract since March, triggered by large-scale covering of short positions and the re-entry of speculative trades looking to benefit from the positive sentiment around the loosening of Covid-19 curbs in China and the consequent reopening of its economy.

"What took place was a mini short-squeeze," a trader said. "And another reason for the price going up is that banks and hedge funds which left the nickel market in March have started returning."

"The price swings are crazy and completely detached from fundamentals," an end user said.

The volatility is best reflected through the movement of nickel prices from 7-15 November, during which the LME benchmark jumped by nearly 30pc. While a better-than-expected energy price outlook in Europe, a softer dollar, electric vehicle demand and China optimism have no doubt helped prices, the scale of the increase highlights the effect of low trading liquidity, which has made the nickel contract sensitive to wild price swings.

Both traders and physical end users are increasingly unable to use the benchmark for hedging, with the fragmented nature of the market and the rise of nickel-adjacent products exacerbating both the volatility and unreliability of the contract tied to Class 1 nickel.

Correction has been under way following the week-long spike, with the contract shedding 11.8pc since 15 November to settle at $26,200/t in today's officials.

"Traders and speculators increased buying activity ahead of contract expiry on the Shanghai Futures Exchange on Tuesday and LME on Wednesday," a market participant noted, adding that buying interest evaporated after the respective expiry of contracts and with the LME price hovering near the $30,000/t mark.

The LME itself has said it was keeping a close eye on nickel trades. "The LME notes the current volatility in nickel," a spokesperson told Argus. "The price limits in place are functioning as expected and the LME is undertaking enhanced monitoring to ensure that participants' trading activities are being conducted appropriately."

The swings in nickel prices this week have come immediately after the LME's decision to maintain status quo with regard to Russian metal, including nickel, allowing nickel produced in the country to be granted official warrants in its warehouses. According to trading services firm Marex, Finland is set to deny Russian Class 1 producer Norilsk Nickel (Nornickel) access to its railways, which will require Nornickel to look for alternative sources of shipping feed to its Harjavalta nickel smelter in Finland.

By Raghav Jain