Readers may remember the chaos unleashed in the world nickel market last year when the London Metals Exchange (LME) caved in to what was alleged by some to be "blackmail" by a Chinese tycoon, Xiang Guangda, and his company, Tsingshan Holding Group.
Xiang had built up his massive short position [in nickel] in late 2021 and early 2022 partly as a hedge, partly as a bet that a planned jump in Tsingshan’s production this year would drag down prices. But when Russia’s invasion of Ukraine jolted global markets, nickel started climbing — gradually at first, before rocketing 250% in an epic squeeze.
On the evening of March 8 , senior bankers crowded into a room at Tsingshan’s headquarters demanding answers. Others dialed in for video calls from London or Singapore. Of those present, some didn’t leave until early the next morning.
The crowd that night was so large because Xiang’s position was spread across about 10 banks and brokers — he had been a good client for many of them, including JPMorgan, for years. But after nickel started spiking on March 7, Tsingshan struggled to meet its margin calls. Now he owed each of them hundreds of millions of dollars.
The LME had eventually intervened to halt trading a couple of hours after nickel hit $100,000. It also canceled billions of dollars of transactions, bringing the price back to $48,078, where it closed the previous day, in what amounted to a lifeline for Xiang and Tsingshan.
To reopen the market, the LME proposed a solution: Xiang should strike a deal with holders of long positions to close out his trade. But a price of around $50,000 would be more than twice the level at which he had entered his short position, and would mean accepting billions of dollars in losses.
Xiang, who is in his early 60s, stood firm. From a start making frames for car doors and windows in Wenzhou, eastern China, he’d built Tsingshan into the world’s largest nickel and stainless steel producer, with an empire stretching from mines in remote Indonesian islands to steel mills on China’s east coast. Along the way, he’d acquired a reputation for visionary thinking and a taste for betting big.
He had caught the attention of the LME before, when in 2019 Tsingshan was on the other side of a short squeeze, withdrawing large amounts of nickel inventories from exchange warehouses and causing prices to jump.
This time, his aggressive approach to trading was having much wider ripple effects.
The spike in prices and the trading freeze caused havoc for companies that use nickel, like stainless steel mills and makers of batteries for electric vehicles. Some simply stopped taking new orders. On the LME, dealers were left frantically trying to recoup missed margin calls from clients who couldn’t pay, and at least one had to seek financial support from its parent company.
Yet with unprecedented chaos rippling through the industry, Xiang — still facing his bankers in the early hours of March 9 — had a key advantage. They were more terrified than he was.
If he refused to pay, they would have to chase him in courts in Indonesia and China. What’s more, he had executed his nickel trade through a variety of corporate entities – such as the Hong Kong branch of battery unit Ruipu Energy Co. – and it wasn’t clear the banks would even have the right to seize Tsingshan’s most valuable assets.
The bankers understood that if things went wrong, their careers would be over, one person who was in the room remembered.
JPMorgan, which had the biggest exposure, took the lead. The group included some international players like Standard Chartered Bank Plc and BNP Paribas SA, but many were Chinese and Singaporean banks that had little experience handling a situation like this.
Xiang told the assembled bankers he had no intention of closing the position anywhere near $50,000. A few hours later he was delivering the same message to Matthew Chamberlain, chief executive of the LME. Tsingshan was a strong company, he said, and it had the support of the Chinese government. There would be no backing down.
. . .
It wasn’t much of a choice. On March 14, a week after the chaos that engulfed the nickel market, Tsingshan announced a deal with its banks under which they agreed not to pursue the company for the billions it owed for a period of time. In exchange, Xiang agreed a series of price levels at which he would reduce his nickel position once prices dropped below about $30,000.
When the market reopened two days later, prices moved lower, easing the strain on Xiang and the banks. A brief dip below $30,000 allowed Tsingshan to cover about 20% of its short position.
The pressure on the LME was only intensifying, however. The exchange’s regulators launched reviews of its governance and oversight. The Dallas Federal Reserve and International Monetary Fund joined in a chorus of public criticism, and many hedge funds were still furious at the LME’s decision to cancel trades.
“The moment we realized what was really happening, we felt we could no longer entrust the LME with our clients’ money,” said Transtrend, a $6.7 billion Dutch algorithmic fund.
There's more at the link.
One might point out that Tsingshan's situation last year is proof of the old adage: "If you owe the bank a thousand dollars, you have a problem. If you owe the bank a million dollars, the bank has a problem." Tsingshan owed so many banks so many billions of dollars that it could not be pressured too strongly without those banks losing everything they'd advanced - so the company, and its founder, got away with their gamble. On the other hand, the LME's actions in not only halting trading, but actually canceling already-executed trades (which worked solely in Tsingshan's favor, and massively to the disadvantage of those who'd made the trades) has resulted in lawsuits against the exchange totalling over half a billion dollars. They're still wending their way through the courts.
To add to the LME's woes, it now emerges that "nickel" recently deposited in one of its warehouses, and registered as such for trade on the exchange, was nothing of the sort.
The London Metal Exchange has found bags full of stones at one of its warehouses instead of the nickel they were supposed to contain in the latest drama to hit the scandal-stricken metals market.
The exchange said in a notice to the market on Friday that it had “received information that a number of physical nickel shipments, out of one specific facility of an LME-licensed warehouse operator, have been subject to such irregularities”. The supposed nickel consignments were actually filled with stone, said a person familiar with the matter.
The LME added that the irregularities in the bagged nickel were “evident, from among other things, by the weight of the bags” and it “reminds licensed warehouse operators of the strict requirement to weigh all metal before it is placed” into the exchange’s approved warehouses.
The discovery comes just weeks after Trafigura, one of the world’s largest metals traders, unearthed a $577mn nickel fraud that has rocked the commodities industry.
The supposed nickel was stored in Rotterdam at a warehouse operated by Access World, which had been owned by Trafigura’s commodity trading rival Glencore until January, according to a person familiar with the matter.
Glencore declined to comment. Access World did not respond to a request for comment.
The acceptance of the fake consignment into the LME’s system is a further blow to the 146-year-old exchange’s reputation after last year’s controversial decision to cancel nickel trades following a historic surge in prices, a move which has attracted regulatory probes and lawsuits from investors.
Following the discovery, the LME asked the warehouse operator to conduct an inspection, which found nine cases of missing nickel, amounting to 54 tonnes of material worth $1.3mn. The LME has ordered all of its licensed warehouse operators to repeat inspections on nickel in storage to check for irregularities.
Again, more at the link.
That's a real black eye for the exchange. If someone hadn't noticed the discrepancy, LME would have authorized trades for that "metal", and only after delivery would the truth have emerged. One now has to ask how many more such cases are in LME's warehouses that have not been detected. I'm sure all sorts of investigations and cross-checks are now under way.
We've just seen how troubles at one or two US banks can suddenly erupt into something threatening the entire financial sector worldwide and forcing an international response. Are we about to see fraudulent and/or criminal activities in the metals market suddenly spread as well? If one warehouse, in one country, at one exchange (albeit the largest), has detected this problem, how many other warehouses of how many other metals exchanges around the world have yet to conduct stringent checks on what their clients claim is in their deposits? What if several, or many, of those deposits are not what they're said to be? What will that do to the metals markets overall? What if these incidents extend beyond the nickel market to other metals as well?
Many questions, few answers - and a lot of money at stake, enough to destroy companies and potentially even shatter the economies of smaller mining nations.