Market Insights > Metals

Base Metals Dashboard - Week Ending March 18, 2022

March 18, 2022 | Chris Stadele

Bottom Line:

Nickel markets reopened this week, but with new rules to limit volatility. The LME Nickel 3M Select contract closed limit-down on Friday at $36,915/mt. It was the third-straight day of limit-down closes for that contract. Limit up/down is the maximum amount that the price of a commodity futures contract is allowed to increase or decrease. The new LME rules are daily limits, which are now +/- 12% starting with today’s (Friday) trade. A technical glitch Friday allowed several nickel trades to occur below the new 12% daily trading limit band. These erroneous trades will be canceled, according to Bloomberg and the LME.

Today’s action was very similar to Wednesday morning’s restart, as a technical glitch in the LMEselect electronic trading platform allowed several nickel trades to occur below what had been a 5% daily trading-limit band. The LME halted electronic trading, and the erroneous trades were canceled. LME resumed trading later that day, but futures quickly went limit-down on thin trading volume. After the close, the LME expanded the trading limit to +/- 8% beginning with Thursday’s trade. Again, in Thursday’s trade, several electronic trades were executed below the 8% trading limit – this time, before the market opened. These erroneous trades were canceled, and the opening was briefly delayed. Thursday’s trade ended early when lower the lower price limit was reached, and only a few contracts changed hands.

The LME applied new, similar limit rules across the board: All other LME metals have a daily price limit of +/- 15% of the prior day’s closing price on their 3M contracts.

The LME implemented these measures after a “short squeeze” caused exceptional moves in the nickel market. On Tuesday, March 8, the LME 3M contract traded to $101,365/mt, a 250% move from Friday’s settle at $28,919/mt. Citing “orderly market grounds,” the LME suspended nickel trading that morning and all trades after midnight UK time were canceled. LME Nickel markets were closed until Wednesday, March 16.

This “short squeeze” stemmed from a large short position in LME nickel contracts held by Tsingshan Holding Group Co, the world’s largest nickel and stainless-steel producer. The short position was meant as a hedge on future nickel sales. To hold a futures position on exchange, hedgers may be required to post margin in the form of cash and other securities to offset any losses that might occur. If losses occur, hedgers or traders might incur a margin call requesting more collateral to hold the position. The short squeeze occurred when prices accelerated rapidly and short positions such as Tsingshan’s were required to put up ever-increasing collateral or face liquidation. To cover margin calls and maintain the short position (i.e., hedge), Tsingshan has received loans from JP Morgan and China Construction Bank, according to the South China Morning Post.

However, most hedging in the US is not done directly on an exchange. It is especially rare for AEGIS clients to trade directly on an exchange, subject to those margin requirements. Instead, our clients almost exclusively place hedges (trades) with banks and other swap dealers (large, regulated traders). These trading counterparties offer margin management as part of the service. Their margin requirements are usually tailored to the company and differ from what the exchange would require. We can guide you in what terms to watch for when selecting counterparties.

LME Nickel price volatility can be mitigated through financial hedging for both consumers and producers. AEGIS urges a statistical approach that measures how much you should hedge to reach your financial goals if prices move against you. Please contact AEGIS for specific strategies that fit your operations.

Notable Metals News

Late last week, Norilsk Nickel’s largest shareholder, Vladimir Potanin, stated that the company has found alternative palladium shipment routes. According to Potanin, the company had previously made palladium deliveries via air; however, most air routes have ceased due to sanctions on several Russian commercial airline companies. He did not specify what new shipment methods have emerged. Norilsk Nickel is the world’s largest palladium and refined-nickel producer, according to Reuters.

Copper prices may be stunted by a rise in COVID cases in China. Shenzhen, a city of 17.5 million and a large technology hub in southern China, entered a lockdown last weekend due to a spike in COVID cases. Foxconn, a major supplier to Apple, briefly halted production at its Shenzhen-based facility due to the lockdown. However, according to CNBC, Foxconn’s production has resumed, albeit on a limited scale. Several other tech firms have also stopped or slowed production, according to Fortune magazine. Market participants cited by Bloomberg fear the lockdowns will slow demand for copper.

However, China is combating the potential impact of COVID by enacting new monetary policies to stimulate economic growth. These measures include new loan growth and easing regulations on real estate and technology firms, according to Bloomberg. China is a large consumer of base metals such as copper, and market participants consider base-metals demand to be a gauge of Chinese economic activity.

LME Aluminum

LME Aluminum 3M settled at $3,381/mt, down $102/mt on the week.

The forward curve for LME Aluminum is currently quite backwardated, meaning that spot prices are higher than futures prices. A backwardated forward curve favors the consumer hedger. The aluminum market has sufficient liquidity to use swaps and options. Consumers might consider strategies that use only swaps or options or a combination of both, depending upon your risk tolerance. Please contact AEGIS for specific strategies that fit your operations.

Midwest Premium

The prompt month (March) last settled at 39.161¢/lb this week.

The CME Midwest Premium swap market is thinly traded, and there is no options market. Hedging in this market is tricky, so we recommend using strategically placed limit orders. Please contact AEGIS for specific strategies that fit your operations.

LME Copper

LME Copper 3M settled at $10,331/mt, up $147.5/mt on the week.

The forward curve for LME Copper is currently quite backwardated, meaning that spot prices are higher than futures prices. A backwardated forward curve favors the consumer hedger. The copper market has sufficient liquidity to use swaps and options. Consumers might consider strategies that use only swaps or options or a combination of both, depending upon your risk tolerance. Please contact AEGIS for specific strategies that fit your operations.

LME Nickel

LME Nickel 3M settled at $36,915/mt, down $11,163/mt on the week.

Like LME copper and aluminum, the forward curve for LME Nickel is currently quite backwardated, meaning that spot prices are higher than futures prices. A backwardated forward curve favors the consumer hedger. The nickel market has sufficient liquidity to use swaps and options. Consumers might consider strategies that use only swaps or options or a combination of both, depending upon your risk tolerance. Please contact AEGIS for specific strategies that fit your operations.

CME Hot Rolled Coil (HRC) Steel

The prompt month (March) last traded at $1,134/T, up $9/T on the week.

For CME HRC Steel, liquidity is low for swaps, but hedging can still be done with strategically placed limit orders. The same is true for options. Similar to other metals, a combination of both swaps and options might work in certain cases, depending upon your risk tolerance. Please contact AEGIS for specific strategies that fit your operations.