Monsters of Rock: LME pledges to right the nickel ship after last year’s reputation-battering short squeeze
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The LME, the world’s largest clearing house for metals contracts, faces an uphill battle to restore liquidity and confidence in the nickel market after a review by advisors Oliver Wyman which found it needs to tighten rules and enforcement processes to prevent market distortions.
Over US$16 billion of margin calls were settled in just four days between March 4 and 8 last year as prices rose 69% to US$50,300/t on March 7 and doubled again on March 8, with almost US$6b in missed margin calls on March 8 as prices stunningly doubled to more than US$100,000/t before the market was shut down for several trading days.
Prices fell over 20% in seven minutes after reaching their all time high before the LME cancelled trades and suspended the market.
Price limits have prevented volatility in the months since, but the LME has been under fire, including in lawsuits, amid complaints from traders whose trades during the morning of mayhem were cancelled by the LME.
The short squeeze, prompted initially by concerns about the delivery of Russian metal — comprising almost 16% of the class 1 nickel market — led to problems for the world’s biggest stainless steel player Tsingshan, the Chinese company led by Xiang “Big Shot” Guangda which was believed to have had hundreds of thousands of tonnes in short bets on the nickel price dropping.
Oliver Wyman has provided seven main recommendations “to reduce the likelihood and impact of events similar to nickel in the future”.
“The most frequent cause of similar events historically is the build-up of large positions that trigger and end up on the wrong side of a major market move, thereby causing cascading client defaults,” the report said. “The recommended objectives, if implemented, would support the LME Group to manage market distortions of this nature. They would support the LME in identifying potential causes for extreme market moves.
“Should an extreme event still occur, volatility controls would help manage the price moves, and stronger risk management rules for members would limit damage from client defaults to the wider market.”
While little metal is actually traded directly through the LME, its nickel price is the basis on which most class 1 nickel contracts have historically been indexed.
The LME said it would deliver an action plan based on the Wyman report recommendation and was “committed to taking all the necessary steps to rebuild the confidence of the metals market.”
“Oliver Wyman’s recommendations are understandably wide-ranging and multi-layered, and as such the LME Group intends to consider them carefully to ensure that the full market impact, and any potential unintended consequences of specific measures, are assessed carefully before moving into the implementation-planning phase.”
But it has started 2023 on a high, climbing almost 9% today after announcing record production in the second quarter at its Bluebird mine, part of the gold miner’s suite of Murchison assets.
It also posed a bonanza drill hit, albeit not at true width, of 36m at 5.02g/t from 557m in drilling at the Bluebird Deeps and South Junction target to the south of the current mine plan.
Bluebird delivered 110,000t of ore at 3.5g/t in the December quarter, mined from underground at the project near Meekatharra. The $535 million miner, which has already begun to reverse its tepid 2022 performance and is up 26.11% YTD as gold prices have risen to almost US$1900/oz, says it aims to expand that production rate to 50,000t a month.
“Westgold’s strategy to make our key mines bigger and more profitable continues, with the expansion of the Bluebird underground mine advancing rapidly,” WGX MD Wayne Bramwell said.
“Our drilling programme is paying dividends with extensions to the north of the current mine plan set to immediately lift production. Enticingly, the early results from the interpreted confluence of Bluebird Deeps and South Junction gives us a glimpse of the potential scale of the greater Bluebird – South Junction complex.
“Bluebird continues to grow in output and is now set to supersede Paddy’s Flat as our largest producer in this part of the Murchison.”
The ASX materials delivered a shot in the arm for the market today, lifting 1.68% as lithium, iron ore, gold and copper stocks caught a bid.
In the background was plans from the Chinese Government to boost fiscal stimulus for property developers as it looks to contain the fallout of last year’s economic struggles.
eToro market analyst Josh Gilbert said China’s Covid reopening was a positive for ASX 200 miners. BHP (ASX:BHP), up almost 30% over the past six months after the price of iron ore lifted 50% since November, is a notable beneficiary.
“The re-opening of China after years of lockdown restrictions continues to benefit the materials sector on the ASX200. So far this year, the materials sector has gained over (five) per cent, with metal prices such as gold and copper continuing to rise,” Gilbert said.
“On top of China reopening, a weaker dollar has also helped support prices, helping local stocks.
“2022 was a strong year for the relationship between China and Australia, particularly with the election of new a Labor Federal Government. This bodes well for local exporters, especially as the Chinese government looks to prop up the property market with fiscal support, reducing risk for commodities such as iron ore.
“This fiscal support from the Chinese government, on top of copper prices rising by more than 5.5 per cent so far this year, has seen BHP start 2023 on the front foot after a strong 2022.
“Copper inventories in China throughout 2022 fell to the lowest levels in decades, so this reopening sets the scene for China to continue stocking up, keeping copper prices higher for longer and supporting local miners.”