Traders warn LME nickel benchmark disconnected from global market

Traders are warning that thin volumes and erratic trading have disconnected the price of nickel on the London Metal Exchange from the rest of the global market.

The metal fell 3.8 per cent on Tuesday to $28,250 after rising as high as $33,575 a tonne last week, with the spike underscoring the severity of traders’ nine-month retreat from the LME.

Nickel for delivery in three months was $293 more expensive on the LME than the spot price at Monday’s close, marking the biggest contango — where the futures price is higher than the spot price — for the metal in at least a decade, according to Bloomberg data.

The dislocation is creating a problem for producers, traders and consumers, who rely on the LME’s price as the world benchmark for their own deals and as a price guide for lower quality versions of the metal. Nickel is a key ingredient in steelmaking and electric car batteries.

Traders believe the futures price is out of line. Its average has been roughly $15,000 a tonne in the years before the nickel crisis.

“Nobody believes it reflects the fundamentals,” said Nikhil Shah, analyst at CRU Group. He argued the price should be in the low $20,000s as the global economy entered a slowdown and countries such as Indonesia raised production levels.

For the LME the nickel market has become a considerable issue since Russia’s invasion of Ukraine, because Russia is one of the main global sources of the metal for its contract.

The 145-year-old exchange has been trying to rebuild its reputation with users after being forced to cancel a day of trades in March when a short squeeze more than tripled nickel prices in a day, to more than $100,000 a tonne. One of its biggest users, Tsingshan, the world’s largest stainless steel manufacturer, was caught out when Russia’s invasion of Ukraine raised fears over supply disruptions.

Some furious users have scaled back the volume of trading and the thinner market is exacerbating price moves. Average daily volumes on the LME were down 60 per cent at 35,400 contracts in November compared with January.

The LME contract represents high purity nickel, but other lower grade nickel products highlight the contract’s disconnect from other markets.

Ferro-nickel, used in stainless steel, was trading at a $100-$300 a tonne discount to the LME price in November 2021, but that discount swelled to $5,000-$6,000 last month, according to Fastmarkets.

Another, nickel pig iron, is trading at roughly $19,600 a tonne, according to data provider Argus. It can be upgraded into LME-grade nickel with further processing at a cost.

“At $30,000, who is buying [LME nickel]?” said one trader. “If you can buy the meat and casing for $22,000, then it makes no sense to buy a sausage for $30,000.”

Malcolm Freeman, chief executive of Kingdom Futures, a commodity brokerage, said some European customers that trade into China have been asking to hedge their risk using the rival Shanghai Futures Exchange (SHFE) nickel contract as a peg. The Shanghai price is trading at about $30,000, where normally it would closely track the LME price.

“There is now a major disconnect between LME nickel, SHFE nickel and the nickel pig iron price,” said Colin Hamilton, managing director of commodities research at BMO Capital Markets. “We see nickel pig iron prices as a better gauge of underlying physical demand.”

Al Munro, a broker at Marex, said higher global interest rates were layering on costs to finance metals trading. “Nickel of all the metals has been impacted most substantially by the higher credit costs,” he said. “On a metal that expensive, it is substantial — as a result of which, many banks have stepped aside.”

Furthermore the LME has also raised the amount of margin that investors must post to backstop their trades to avoid the kind of market meltdown that was on the verge of unfolding in March. “It has become prohibitively expensive to trade nickel,” said Munro.

One trader blamed the LME for further stoking the thin market by closing trading during Asian hours, which was blamed for accelerating the short squeeze in March.

“They don’t want to have a repeat of the situation earlier this year but it doesn’t make for liquid markets,” said Geordie Wilkes, head of research at Sucden Financial.

The LME said it was working on reopening Asian trading of nickel as a priority. “This would revitalise the arbitrage opportunities and help liquidity to pick up. We hope to announce a return to Asian hours trading very soon.”