Nickel has had a tumultuous year following the outbreak of the Russia-Ukraine war in February, the market collapse following a short squeeze in March and the fragmentation of physical nickel forms on account of the rapid rise of class 2 and intermediate products. These themes dominated the conversation at last week's London Metal Exchange (LME) Week.
Following March's short squeeze and temporary suspension of LME nickel trade, many participants abandoned the market or reduced their exposure, with the resulting liquidity crisis leading to sudden price swings in the three-month contract — often unrelated to fundamentals.
"The real price of nickel at the moment is $18,000-20,000/t," an end-user told Argus on the sidelines of the conference — the official LME price was $22,450/t.
While liquidity has been consistently low, LME Week attendees were encouraged by early signs of a rebuilding of trust in the benchmark nickel contract, even though there is an acknowledgement that the macro-driven wider economic downturn will delay the return of real stability.
"In recent engagement with our various systematic and discretionary clients, the feedback we are getting is that they are keen to start trading the LME nickel contract again," said Al Munro, an analyst at trading services firm Marex. "Volumes have not particularly picked up of late, but we think this is part of a malaise afflicting the wider financial and commodity markets."
"Our liquidity model does confirm that in the last two months nickel liquidity has been improving," said Geordie Wilkes, head of research at UK trading group Sucden Financial.
Several market participants said the recovery of nickel trading activity also hinges on the market opening up to arbitrage trading during the Asian morning session. Nickel trading does not commence until 8am London time, a measure introduced by the LME in March and driven by the fact that the short squeeze had its roots in China.
Addressing attendees at the LME's annual dinner on 25 October, LME chief executive Matt Chamberlain indicated that a return is being pursued.
"I understand the repeated calls from arbitrage traders who want a return to Asian-hours nickel, and who believe this will also act as a catalyst for volumes," he said. "We continue to finalise our framework to ensure this can be properly managed and I expect to provide a fuller update to the market in November."
Russia is the other main source of near-term volatility. The LME is currently in discussions with market participants on the future of Russian metals in LME warehouses, including nickel. Participants expect Russian supply to continue to flow in any circumstance, sold at discounts to LME-deliverable nickel in the event of a ban, with China tipped to absorb most of it during 2023.
The low share of Russian supply in current LME stocks and the rise in production and consumption of class 2 nickel products resulting from Chinese investment in Indonesia could mitigate the impact of an LME ban on Russian metal.
Class 1 nickel that can be delivered against the LME's contract will account for 650,000t, over 20pc, of global nickel production this year, compared with 50pc in 2012, according to Jim Lennon, analyst at consultancy Red Door Research.
But the market is concerned about how deals involving Russian nickel would secure financing in the event of an outright ban. Most existing working capital contracts used by buyers and sellers involve a specification from issuing banks that any metal be LME-deliverable, and traders are in unknown territory on how a potential ban would impact deal financing.
LME Week attendees were further divided over the possible creation of LME price benchmarks for class 2 nickel and nickel sulphate — prices for these increasingly disconnect from LME-deliverable forms. Participants generally saw no feasibility in nickel pig iron and ferro-nickel benchmarks as liquidity in the markets was not deemed broad enough to establish a recurring price index. But they were more upbeat about the possible creation and use of an LME-payable nickel sulphate contract.
Chamberlain ruled out the possibility of new contracts being launched by the exchange in the near term, emphasising instead the need for stability and continuity of LME nickel prices.
"We will only proceed with [class 2 and/or nickel sulphate contracts] if we're confident the pricing basis for such a contract is entirely robust, fair and transparent," Chamberlain said.
