European nickel users were largely unwilling to trade the benchmark nickel contract in the three days that followed the restart of trading at the London Metal Exchange (LME), with most assessing the underlying LME price as disconnected from physical supply and demand fundamentals.
"There is just no appetite from buy-side traders with the current price level," a market participant said on 17 March. "There were 12,000-13,000 lots on offer today but received no bids."
The three-month nickel contract was suspended by the LME on 8 March following an unprecedented spike of more than $100,000/t, making a fraught return on 16 March with the LME extending upper and lower price limits to nickel, as well as the rest of the base metal complex.
With the curbs in place, nickel hit its down limit immediately after trading opened over 16-18 March, despite the LME widening the daily price movement limits from the initial 5pc first to 8pc on 16 March and then to 12pc the next day, indicating mainly sell-side activity.
"A down limit of 15pc is the bare minimum for some short covering to start taking place," the same market participant said. "And even at that rate, bids are only likely to come forward after Monday's close."
The physical market is currently evaluating nickel at about $30,000/t, significantly lower than the current LME price of $41,945/t and appearing to closely follow the Shanghai Futures Exchange (SHFE) price of about $34,300/t.
"$30,000/t is what is being spoken of in market circles." the same market participant said. "If you take today's SHFE price and adjust the import tax and VAT that is priced into the contract, we get roughly $30,000/t."
"Physical players are not pricing on SHFE to my knowledge," a trader said. "But the view is that the benchmark LME contract needs to be more in tune with Shanghai."
The majority expectation is for the three-month nickel contract to keep hitting its down limit in the coming days until it converges with SHFE prices.
"The LME price will eventually settle at roughly the same level." the same market participant said.
The nickel trade suspension and cancelled trades last week, together with a series of technical faults on its return this week, has further put the functionality of the 145-year old exchange in the spotlight.
"To say LME will no longer be the global benchmark would be going too far, but there is no doubt it has to get its house in order," a trader noted.
