Since its implementation, the London Metal Exchange (LME) has been widely regarded as a respected and renowned metals exchange, built on the foundations of trust, dependability, and professionalism – at least, up until this last year.
Rewind back to March 2022 when nickel trading on the LME erupted into chaos, with prices hitting eye-watering new heights, spiking over 250% in barely 24 hours. This caused the exchange to suspend trading on 8 March.
At the epicentre of the disaster was Chinese billionaire Xiang Guangda and his business Tsingshan Holding Group Co., a major global player in nickel and stainless-steel production.
According to the Washington Post, Tsingshan had been shorting nickel because it expected a rapid production increase from new factories in Indonesia. Then came Putin’s invasion, entangling Russia’s nickel supply which accounts for about 5% of the world’s nickel.
A price jump sparked a “short squeeze” – a term for what can happen to traders who have bet on a price falling when it rises instead. To stop losses, short sellers quickly bought back securities they used to make their bets, accelerating a rise in prices. This then forced the LME to cease trading and cancel billions of pounds worth of nickel trades – causing anger amongst investors.
Now comes a new scandal, with the LME discovering bags of stones instead of nickel, underpinning a handful of its contracts at a warehouse in Rotterdam in the Netherlands. This new disclosure chips away at the already wilting confidence investors have in the flailing exchange.
While the amount of metal affected represents just 0.14% of live nickel inventories on the LME (worth about US$1.3M at current prices), it has delivered another blow to the standards of conduction expected of them.
“LME warehouse warrants used to be the gold standard of warehouse warrants around the world, treated as a near-cash equivalent,” John MacNamara, CEO of Carshalton Commodities Ltd. and a veteran commodity trade finance banker wrote on LinkedIn. “Something has gone horribly wrong at the LME.”
According to Reuters, the LME has been hit with new lawsuits on top of existing legal action by US hedge fund Elliott Associates and Jane Street Global Trading, which are suing for a total of US$472M for LME’s decision to void nickel trades.
The London Metal Exchange said last week that sacks thought to hold 54t of nickel in an unnamed warehouse had failed to comply with its standards. Now, new revelations surrounding the story have stated that JPMorgan Chase were the owners.
The unaccounted-for nickel is another significant blow to LME’s already fragile reputation. It’s also a further smudge on the nickel market, which has become problematic for the metals industry just as demand for the silvery metal is shooting higher among electric vehicle makers.
Access World, who owned the warehouse in question and are a leading service provider for all major commodity markets, has confirmed to Reuters the fake nickel was in one of its sheds in Rotterdam.
The company is “currently undertaking inspections of warranted bags of nickel briquettes at all locations and will engage external surveyors to assist,” it said.
The LME has responded by requiring all other warehouse operators to verify its nickel and instructed holders of off-warrant stocks to conduct their own inspections if they haven’t already after the Trafigura revelations.
LME recently released a report expressing the following statement:
“The irregularities relate to bagged nickel briquettes, and were evident from, among other things, the weight of the bags. In this context, the LME reminds licensed warehouse operators of the strict requirement to weigh all metal before it is placed on warrant,”
“The LME has no reason to believe at this time that any other LME-approved facility is affected – particularly since, as set out above, the mandatory weight-based load-in check would identify such irregularities,”
“Out of an abundance of caution, the LME has requested that all licensed warehouse operators re-undertake relevant inspections on warranted nickel,”
The LME notes that its other metal contracts do not allow bagged delivery, and hence are not susceptible to this type of irregularity.”
