The tale that ensues involves billions of dollars, Russia, a Chinese tycoon known as “Big Shot,” daytime drinking and a metal exchange stuck between two large rocks without a chisel.
For the majority of the last decade, nickel prices were boring. On the London Metal Exchange, the premier trading and price-formation venue for industrial metals, nickel traded between $10,000 and $20,000 per metric ton and moved about $100 each day.
Then in early March a short squeeze of epic proportions, prodded by Russia’s invasion of Ukraine, awoke the sleeping giant.
The spike generated margin calls higher than the LME had ever seen — and if paid, they would force multiple defaults that would ripple through the exchange and destabilize the global market.
Exchange executives scrambled to respond, ultimately throwing a lifeline to the brokers representing Tsingshan and other producers. In an unprecedented move, they halted trading and retroactively canceled all 9,000 trades that occurred on Tuesday, worth about $4 billion in total.
The market would remain dark for a week, unleashing a tidal wave of chaos and a mob of angry investors onto the exchange. In its wake, threats of lawsuits abound and trust has eroded.
Kicking and screaming into the 21st century
Over the past century-and-a-half the LME, known for its ring of red couches and barking brokers, has successfully trudged its way through world wars, meltdowns and defaults. But nickel, the metal used in stainless steel and the lithium-ion battery cells in most electric vehicles, might be what finally brings the world’s largest market for base metals contracts to its knees.
“The world’s pricing mechanism for nickel is failing,” said Daniel Ghali, the director of commodities strategy at TD Securities. “The question is, will it continue to fail?”
Others weren’t as diplomatic. “The LME is now very likely going to die a slow self-inflicted death through the loss of confidence in it and its products,” tweeted Mark Thompson, executive vice-chairman at Tungsten West, a mining development company.
The LME functions as a utility for metals producers, setting the price at which they sell their goods to various businesses and serving as a way to hedge against downturns in their industry. Other investors see it primarily as a money-making tool, a part of a well-balanced portfolio. The exchange needs both parties to function, but underlying problems are ready to boil to the surface.
Unlike stock exchanges, the LME deals in physically deliverable contracts: There are actual, nickel-backing trades that will be delivered. For most of its history, that served the miners, traders and manufacturers well.
But in recent years the exchange has been pushed to start moving into the 21st century. Until 2012, the LME was owned by its members, the same people who traded on the exchange — but then it was sold to Hong Kong Exchanges and Clearing (HKEX) for $2.2 billion. The new owners raised fees to recuperate some of their investment, upsetting the community. Volumes dropped significantly, and the chief executive and operating officer left.
So the LME wooed a new class of customer to bring volumes back up: hedge funds, and other major financial players.
Big money flooded in. The reform part, however, didn’t go as well.
“When I joined the LME floor in the late 1970s, it was very much a ‘my word is my bond’ type of place,” said John Browning, the managing director of BANDS Financial who served as a board member of the LME and the chairman of its e-commerce committee between 2002 and 2004. “There were probably as many deals done on the floor as there were in the pub next door.”
“I have seen the floor in the afternoon and there are those who overdo it,” veteran trader Malcolm Freeman recalled to the Financial Times.
But as trading surged, so did concern that boozed-up brokers would fumble away investors’ cash.
In 2019, the LME officially banned daytime drinking and required that traders remain sober on the floor. The exchange also issued a code of ethical conduct after it was criticized for hosting a cocktail party at The Playboy Club.
More technical changes were also proposed.
In 2021, Chamberlain attempted to get brokers to agree to clearer reporting on…