LME faces $500 million lawsuit over short nickel squeeze

Nickel prices appeared to have bottomed out in mid-May, but the trend remains down. Moreover, recent price action has shown few signs of bullish structures on a weekly basis. In total, the monthly Stainless Metals Index (MMI) fell 9.4% from May to June.

LME faces nearly $500 million in lawsuits

The nickel crisis made headlines again earlier this week. Two financial groups have sued the LME over its decision to cancel transactions following the March 8 nickel squeeze. Trading firm Jane Street Group LLC and hedge fund manager Elliot Management Corp. deposit lawsuits of $15.3 million and $456 million respectively against the stock exchange for its handling of the crisis.

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The owner of the LME, Hong Kong Exchanges & Clearing Ltd. acknowledged the lawsuits in a statement. It read: ‘LME management is of the opinion that the claim is without merit and the LME will vigorously contest it.’ Jane Street, however, called the LME’s decision “unlawful” and “arbitrary”. They went on to say that this “seriously undermines the integrity of the markets and sets a dangerous precedent that calls future contracts into question.”

lawsuits follow ongoing review of LME actions by key LME regulators, the Financial Conduct Authority and the Bank of England. After this was announced in early April, these reviews are being heightened by the LME’s own independent investigation.

Nickel Price: A Tale of Two Exchanges

While the lawsuits have once again drawn attention to the nickel price crisis, the real fallout continues. Some believe the departure of nickel traders from the LME likely followed the chaos and the exchange’s controversial approach. However, the ramifications of the crisis remain apparent across the world.

The LME and SHFE continue to face low liquidity. Trading volumes on the LME fell when nickel trading resumed in March. Meanwhile, open interest continues to drop steadily. Although the SHFE did not face the same suspension in early March, it saw a sharp drop in trading volumes during that week as open interest plummeted. Volumes and open interest remain limited to date.

While nickel’s withdrawal from the market was a global effort, other metals remained largely unaffected.

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Nornickel projects slowed demand growth

According to the world’s largest producer of high quality nickel, demand for nickel will continue to grow but will slow from +17% in 2021 to +11% in 2022. Nornickel also expects global inflation and macroeconomic uncertainty explain much of the slowdown. The producer’s previous forecast for a crude surplus of 40,000 tonnes (expected to increase to 100,000 tonnes in 2023) of low-grade nickel remains unchanged.

Nickel, along with other commodities, has faced numerous price pressures throughout the past year. COVID-related lockdowns and restrictions continue to disrupt the supply chain. Combined with tight nickel inventories, this has generated considerable bullish sentiment in 2021. The ongoing Russian invasion of Ukraine, which preceded the historic nickel contraction, also remains a concern. This is particularly relevant as global inflationary pressures threaten the demand outlook.

Nornickel’s forecast is based on two factors. First, there is the scale of China’s economic recovery as it gradually emerges from lockdowns. Second, it is important to consider the impact of future interest rate hikes planned by the Fed. Indeed, these two forces are likely to influence the direction of prices for all commodities over the coming months.

By AG Metal Miner

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