Nickel dogged by liquidity concerns and price volatility

The wild swings in the nickel price have pointed up the long road ahead for the London Metal Exchange in its efforts to regain the market’s confidence in using its global benchmark for trading the precious metal.

The price of high purity nickel for delivery in three months under the LME contract fell 15 per cent in the three days to Friday to $25,235 per tonne, after climbing 20 per cent in the five days beforehand and peaking at $31,275 per tonne.

The choppy market conditions underscored how the chaotic events of March still hang over the exchange. One of the nickel market’s biggest traders, China’s Tsingshan, was caught out by the war in Ukraine and a sharp squeeze on prices.

Nickel on the LME doubled to more than $100,000 a tonne, a record, and the outsized margin calls threatened to engulf smaller brokers. LME chief executive Matthew Chamberlain was forced to suspend trading for a week and cancel more than eight hours of trades, causing uproar among many of its users. LME trading volumes have declined since then as many traders have pulled back their activity — the resultant thinner market has exacerbated market moves.

In an effort to stabilise this week’s volatility, the LME undertook “enhanced monitoring” of market participants’ trading activities and lifted initial margins — insurance to back new trades — for nickel trades by 28 per cent to $6,100 per tonne from the close of trading on Friday. Market prices also hit the 15 per cent ceiling of the exchange’s daily trading limit on Monday, introduced to damp down sharp moves.

Metal strategists said another factor driving the wild price swings was the low level of inventories in exchange warehouses. LME stocks recently dipped below the 50,000 tonnes mark to hit a 14-year low in a sign of a tight market, according to Commerzbank.

Part of the nickel market’s troubles stem from the fact that only high-grade nickel used in batteries and alloys can be used to fulfil LME contracts, yet that is only a small chunk of global supply and excludes the low-grade supply used in stainless steel.

A functioning nickel market is crucial, with demand expected to balloon from 2.4mn tonnes to 3.8mn-4.8mn tonnes per year by 2030 as electric vehicles take off and stainless steel use keeps growing, according to RFC Ambrian, an advisory group.

The LME is set to release its external review and recommendations into the conditions that led to the previous nickel market dislocation next month.

“We do see some urgency needed to rebuild some nickel consumer confidence in quoted market prices,” said Colin Hamilton, managing director of commodities research at BMO Capital Markets, an investment bank.