In today's Finshots we talk about the rally in Nickel prices. It's kind of complicated and I hope you bear with us.
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Alright, on with the story now.
The Story
Nickel is a pretty useful metal. It doesn’t corrode easily and is used in stainless steel, guitar strings, coins, and lithium-ion batteries. Needless to say, the metal is always in high demand.
But then Russia invades Ukraine. And with that everything changes.
Russia happens to be the third-largest producer of Nickel. And considering nobody wants to deal with Russia anymore, about 10% of the Nickel supply is effectively choked off at the moment. Don’t get us wrong. The metal is still in high demand but you’ll see supply disruptions soon enough.
And this should be evident considering the price of the metal rose — from $30,000 to $100,000 per tonne in just a couple of days. The London Metal Exchange (LME) that facilitates the Nickel trade had to stop people from buying and selling the metal.
It’s kind of insane.
But wait — How did all this happen in just 2 days? Shouldn’t it take more time?
Well, it should. But we didn’t talk about how the Nickel trade works. More importantly, we haven't discussed an important piece of the puzzle — a Chinese nickel-producing tycoon nicknamed “Big Shot”.
Let us explain.
When you’re mining Nickel, you have to deal with one particular problem — price volatility. It’s like this — Suppose you imagined that Nickel will sell at $30,000 per tonne once you’ve mined and processed it, but during this time, the price dips— from $30,000 to $28,000. Then, all your calculations go for a toss and you’ll have to take a hit on your bottom line. It’s not a pleasant experience.
So you turn to a commodity exchange like the London Metal Exchange and try to protect your downside. You make a trade — a bet — where you stand to gain if the price does go to $28,000. Obviously, the flip side is that you lose money if the price rallies. But you’re not too worried about that since this financial transaction is expected to help you tide over the potential loss we discussed earlier.
With us so far?
Okay. Now imagine you’re a Nickel producer who is fairly certain that the price won’t rally a lot. If anything you’re expecting a total collapse in prices. And you begin making a lot of these bets at the exchange. So much so that others are taking your cue. They’re also trying to bet against Nickel.
A fall in price is due anytime soon.
But then Russia invades Ukraine.
This completely destroys your thesis. Prices won’t go down. Instead, they’ll start shooting up. So you’re forced to take the other side of the bet now or risk making huge losses. And with the sudden reversal in expectation, Nickel prices rise even higher. Within days, the London Metal Stock exchange has to suspend trading because they’re no longer sure if people will be able to come good on their bets — actually put up the money they owe.
In fact, this is what happened recently.
The Chinese entrepreneur Xiang Guangda aka “Big Shot” was betting that nickel prices would fall. And his nickel-producing company — Tsingshan Group made these bets for him. The bet went horribly wrong when prices shot up. And as they scampered to try and fix the blunder, they ended up pushing prices even higher.
And at the end of it all, LME was worried that Xiang wouldn’t have enough money left over. So they quickly stepped in, stopped facilitating trades and even junked some of the earlier bets. All in the hope that the market would come to some semblance of normalcy.
So yeah, right now Nickel prices are still sky-high and LME hasn’t restarted trading. How will this play out when trading resumes? Well, we don’t know. But we imagine it won’t be very pretty.
Until then…
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