As the war between Russia and Ukraine rages on, our increasingly volatile economy faces new challenges daily. One unmistakable event has been the sudden inflation of nickel prices leading to the suspension of trades on the London Metal Exchange, a decision that has drawn widespread criticism.
Continue reading our article to explore how a Chinese nickel company lost $8 Billion (RM35 Billion) in a matter of days.
On 8 March 2022, the price of nickel on the London Metal Exchange doubled in a matter of hours and skyrocketed to $100,000 per metric ton – a record high. While high prices may be like a win for buyers, short sellers will have to brace for unlimited losses.
Before we talk about the nickel company’s misfortune, let’s first discuss why nickel prices surged. Russia is a major nickel exporter, accounting for 7% of the global production of nickel. In light of the Russo-Ukrainian conflict, economic sanctions were imposed on Russia to restrict trade as a financial penalty for the aggression on Ukraine. This meant that already low global inventories of nickel were further disrupted, significantly driving up prices for the metal.
A side note: a similar trend of inflation could be observed in products such as oil, vehicles and wheat.
Consequences and Aftermath
In response to the sudden nickel price surge, the London Metal Exchange (LME) was forced to halt a day’s worth of trades in order to restabilise the market. Ever since restarting nickel trading, LME has implemented daily price limits on outright contracts, demonstrating a first in its 145-year history.
Meaning, once the commodity price hits a certain level, it can’t go any higher. The exchange cancelled all 5,000 nickel trades that had been executed on Tuesday, which might’ve been a nearly $4 Billion payday.
It is estimated that the exchange had wiped out $1.3 Billion of profit and loss on the cancelled deals. Market participants accused LME for picking sides on Tsingshan Holding Group (a Chinese company) and their parent company Hong Kong Exchanges and Clearing having influenced its decision.
Closing the market allowed Tsingshan Holding to realise a gigantic loss.The decision to close the market by LME, was arguably damaging to their reputation and investor confidence in executing trades.
What do high nickel prices mean for you:
Nickel being one of the key components of lithium-ion batteries, is central to the production of electric vehicles and battery storage systems. Higher prices of nickel could mean pricier electric vehicles and renewable energy storage systems, reducing its attractiveness to consumers.
This in turn leads to a lower adoption of electric vehicles and renewable energies, which may worsen the climate crisis. In spite of the higher prices, governments could consider offering higher subsidies to lower the prices of electric vehicles and encourage adoption.
But are consumers willing to pay higher taxes?
Nickel is also used in the production of stainless steel, which has various use cases across multiple industries for industrial and consumer applications. As such, nickel price is positively correlated to stainless steel price. A price hike in nickel may have a spillover effect on the industries where stainless steel is used extensively.
How to Keep Nickel Prices Lower? : Supply-Side Reforms
- Increase nickel production by offering incentives to open new nickel mines.
- Increase investment, adoption, and production of nickel-free batteries. By adopting nickel-free batteries or increasing investment in nickel-free battery research to make them more efficient, we can reduce reliance on nickel to meet our battery demands.
- Increase investment in recycling nickel-based batteries and stainless steel to reduce dependency on mining new nickel.
Now, back to how a Chinese nickel company lost $8 Billion in a matter of days.
You don’t have to “buy low and sell high” to profit from the asset market. Anyone who firmly believes an asset is overvalued can engage in short selling. To illustrate the idea of short selling, let’s say there are two investors, Tim and Dave. Dave owns some gold, which is currently worth RM10.
Tim believes that gold is overvalued and thinks it will go down in the future. To act on his thesis and make a profit, he would borrow the gold from Dave and sell it.
Suppose the price of gold does go down to RM5, Tim still owes Dave gold, so he would then purchase the gold at RM5, and return it to Dave. Tim pockets the difference of the gold prices, thereby making a profit of RM5.
Asset price goes up: Tim has to buy the asset at a higher price and return it to Dave who not only enjoys the increase in value, but additional interest on the loan as well. Asset price goes down: Tim earns a profit from the price difference, and Dave still earns some interest, but loses out as his asset has fallen in value.
How the Chinese company lost so much: when trading an asset, you stand to lose 100% of your investment, but when you engage in short selling, there is infinite risk.
If we go back to the example of Tim and Dave, suppose the gold price were to jump to RM100, Tim would have to add more money out of his pocket to purchase the gold (remember, he has borrowed the gold and has to return it).
In short, the inadequacy in risk management led to Tsingshan holdings suffering a huge blow from the nickel price surge, in addition to the effects of geopolitical tension on nickel supply
References:
Shalaba, Z., 2022. LME watching nickel after price soars on Russia supply concerns. [online] Reuters. Available at: <https://www.nasdaq.com/articles/lme-watching-nickel-after-price-soars-on-russia-supply-concerns> [Accessed 27 June 2022].
Meredith, S., 2022. Systems error triggers fresh chaos as LME suspends nickel trading once again. [online] CNBC. Available at: <https://www.cnbc.com/2022/03/16/metals-lme-suspends-nickel-trading-once-again-on-systems-error.html> [Accessed 27 June 2022].
Reuters. 2022. LME nickel soars by a record 30% on Russia supply concerns. [online] Available at: <https://www.reuters.com/business/london-nickel-rises-25-after-market-open-2022-03-30/> [Accessed 27 June 2022].
Iaconangelo, D., 2022. Nickel shortage spells trouble for EVs — report. [online] Energy Wire. Available at: <https://www.eenews.net/articles/nickel-shortage-spells-trouble-for-evs-report/> [Accessed 27 June 2022].
Researchers: Umar Fazlan, Calvin Kwa, Lee Shuen
Reviewers: Muhammad Bahari, Marcus Wee
Editor: Marcus Wee
