I haven't written about nickel today but it's an extremely interesting and serious story that has big implications for commodities and commodity trading going forward.
There were no daily limits on the contract and it doubled and then doubled again today.
What metals analyst Mark Thompson reports is that a 'major nickel producer' is the one on the wrong side of the trade.
The company saw an opportunity to hedge its production at an average of $21,000 so it did so via futures.
The problem is that you need to put up collateral against the trade. Normally, you could meet the margin call because you're hedged, so all you need to do is deliver the goods and the loans pay themselves off.
The problem is that at $80,000 there's a mark-to-market loss of $12 billion on a reported 200kt.
That's a gigantic margin call for someone to meet on short notice and even if you have a banking relationship, the bank might not be able to come up with that kind of money.
There's also talk of mismatches with the grade of nickel from the producer not the same as contracts for delivery, so even if it could be unwound with physical production, there could be a real-market squeeze. That raises the stakes for any company involved.
Moreover, it might be through a bank that that nickel company hedge was placed, via some kind of contract. All trades since midnight today have been busted and there's also talk that the last two days of trades could be busted, which would be a huge black eye for the LME.
The company is reportedly Tsingshan Holding Group, the world's largest nickel and stainless steel producer. A worst-case scenario is that the company is forced into default and a tight nickel market gets even tighter.
In the bigger picture, other companies may see this as a reason not to hedge or to take off hedges. That will make the market even more volatile.
And naturally the triple-levered nickel short ETF was wiped out; because triple-levered ETFs are a dumb idea that never should have been approved (and they tell is bitcoin ETFs are too dangerous).
