Trafigura chief says LME nickel contract is ‘not fit for purpose’

The head of Trafigura, one of the world’s largest commodities traders, has warned that the London Metal Exchange’s global nickel benchmark is unfit for purpose and needs reform to reflect the rapid rise of the battery market.

The warning comes just days after the LME said it discovered bags of stones instead of nickel in one of its warehouses, dealing a further blow to a contract that is already suffering from low liquidity levels.

The LME contract is for high-purity nickel, which is chemically very different from the nickel sulphate used for most battery applications. The latter has experienced a surge in demand as electric vehicles have grown in popularity.

Jeremy Weir, chief executive of the Singapore-based trader, told the FT Commodities Global Summit in Lausanne the LME contract was “not fit for purpose for the global nickel industry when we include the battery market”.

“The battery market is now the largest part of the industry, therefore the LME contract does not necessarily reflect the underlying [structure] of a large part of the industry,” he said. “We have to have the contract or contracts to reflect the underlying business and we’ve just seen a major change.”

His comments join a growing chorus from trading houses and miners, including BHP, calling for an overhaul of the LME nickel benchmark.

The market has been further complicated in recent years by Chinese nickel producers in Indonesia that have made technological breakthroughs, causing a proliferation of different forms of the metal that cannot be delivered against the LME contract.

The LME, which this month intends to publish an action plan detailing its proposals to improve the nickel contract, said in a statement that it recognised the structural shifts in the market.

“Our current focus is on rebuilding liquidity in our class 1 [high-purity] nickel contract and we continue to explore ways in which we might enhance the contract specifications,” it said.

The bags of stones that were discovered in its warehouse caused the LME to cancel nine nickel warrants, worth about $1.3mn in total.

In a separate development, Trafigura filed a lawsuit last month in London alleging it was the victim of a $577mn nickel fraud perpetrated by Indian businessman Prateek Gupta — one of the biggest metals scandals in years.

Trafigura said it purchased containers of purported nickel which were subsequently found not to contain any nickel. Instead several of the containers held carbon steel.

Responding to questions about what happened, Weir said Trafigura had conducted a thorough review of its internal operations, and concluded that no one inside the company was complicit in the alleged fraud.

“It was a very detailed audit across many facets of the organisation,” he said. “Were people involved internally? No.”

“We’re starting to make those changes and we’ll continue to make some changes,” he said, without elaborating

Known as the devil’s metal, nickel is the most expensive industrial metal, making it a natural choice for fraudsters.

Trafigura announced a $577mn writedown associated with the potential losses from the case.

A spokesperson for Gupta said: “We are preparing a robust response to the allegations from Trafigura and intend to share that soon.”

The defence is due to be submitted to the court by April 6.