Ukraine crisis rocks nickel, London Metal Exchange

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The immediate concern is whether the LME can fix its broken nickel contract

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LONDON — The war in Ukraine has engulfed the 145-year-old London Metal Exchange (LME), which sits at the epicenter of global industrial metals trading.

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What Russia calls its “special operation” breached the LME nickel contract and forced the exchange to impose emergency measures on the rest of its major base metal contracts.

This is the story of two crises.

The first is the threat of supplies from Russia, a major producer of aluminum, copper and, of course, nickel.

Even in the absence of explicit sanctions, Russian metal exports must now manage tighter financial, logistical and trade restrictions as more companies abandon ties with Russia.

Industrial metals were already in bullish mode. The war in Ukraine has poured oil into boiling markets, particularly nickel, where soaring prices have shattered huge short positions held by China’s Tsingshan Group.

This then triggered the second crisis.

Nickel rose 61% to $48,078 a tonne on Monday March 7 (over $13 a pound), generating massive cash calls to meet margin calls and threatening what the LME called “risk systemic for the market” with potential “multiple defaults” among LME brokers.

Nickel was suspended the following Tuesday, but will resume on March 15.

All other metals traded on the LME were caught in the storm, with the ripple effect determined by each market’s exposure to Russian supply and LME margin shocks.

PAIN AT THE MARGIN

Trading in metals last week was all about “margin and pain,” LME broker Marex Spectron said in a note to clients.

LME basis contracts are not cash-settled futures contracts but futures contracts with positions funded by collateralized lines of credit. Nickel’s explosion necessitated huge margin collateral increases not only from Tsingshan but from all other short position holders.

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This triggered a domino effect as positions in other markets were liquidated to raise urgently needed funds.

As nickel went supernova on Tuesday before the LME pulled the plug at 8:15 a.m. London time, so did zinc and lead.

Zinc hit an all-time high of $4,896 per tonne and led to a 10-year high of $2,700 per tonne in the early hours of trading.

By the end of the day, both were roughly back to where they started, suggesting that the spike was due to a sudden forced exit from short positions.

Aluminum moved in the opposite direction, with the three-month metal falling from Monday’s high of $4,073.50 a tonne to $3,498.00 at Tuesday’s close.

Tin was similarly affected on Wednesday, with the long-running uptrend abruptly halted as the solder metal fell from $49,500 to a low of $39,080 a tonne.

Copper was the least affected, most likely because its recent range bound trading pattern left it devoid of speculative, bullish or bearish positioning.

The price behavior of others suggests that profitable positions have been liquidated to replenish nickel losses – short positions in zinc and lead contracts, long positions in aluminum and tin markets.

RUSSIAN SUPPLY LINES

The LME has imposed offset limits on its major contracts and is also expected to introduce price bands.

All six are physically deliverable and to varying degrees vulnerable to a possible suspension of Russian exports amid escalating electricity prices in Europe.

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It was the fear of a Russian nickel supply disruption that first pushed the price up towards and eventually through the big short.

Norilsk Nickel was not sanctioned but is a major supplier of refined nickel to the European market, accounting for around 63% of consumption in 2020, according to Natixis analysts. (“Russian metal, sanctions against militarization?”, February 24, 2022)

The company is also a strategically important global supplier of palladium, which is why the price of palladium went crazy last week, hitting an all-time high of $3,441 an ounce.

Russian copper is less important for Western markets, representing only 4.4% of European consumption, according to Natixis. Which helps explain the relative calm in copper prices over the past two weeks.

Aluminum has its own supply issues in the form of UC Rusal’s four million tonnes of annual production.

The company and its owner Oleg Deripaska were briefly sanctioned in 2018. Deripaska was sanctioned again, although his reduced role in Rusal – a condition for lifting the initial measures – may provide some protection for the company.

Self-sanction, however, is already in motion, with Rio Tinto, a Rusal partner at the bauxite and alumina stage of the supply chain, vowing to sever all ties.

It remains to be seen what this means for assets potentially blocked by sanctions such as the Aughinish alumina refinery in Ireland, owned by Rusal but supplied by Rio Tinto.

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The LME aluminum price is currently trading around $3,380, suggesting a relatively bullish view of an impending global shortage.

Physical bounties in the US and Europe, however, are steadily hitting new all-time highs, indicating serious supply issues in both regions.

ENERGY CRUNCHY

Any disruption to Russian metal exports could not come at a worse time for many metal users, especially those in Europe.

Aluminum and zinc production in the region was already reduced in response to high electricity prices, which increased further following the Ukrainian crisis.

For now, metals are in the grip of a supply shortage as unexpected as was Russia’s “special operation” in Ukraine.

This could well turn into a demand crisis, if continued hostilities translate into a recession.

That’s for the future, though.

The most immediate concern for all metal traders is whether the LME can mend its broken nickel contract.

In the meantime, metal price risk remains subordinate to systemic market risk.

[email protected]

Twitter: @SudburyStar

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