When people think of disruption to metal supplies, they either think a mine has gone offline or social conflict, but there is another link in the supply chain for metals that causes disruption...financial markets which the recent conflict in Russia is revealing for nickel prices.
The Russian assault on Ukraine and the ensuing sanctions from Western nations shook metal markets with speculative interest on physical supply concerns, despite no import restrictions of Russian metals at the time.
Russia supplies about 10% of the world's nickel but what stands out is Nornickel is the world's biggest supplier of battery-grade nickel at 15%-20% of global supply, according to JPMorgan analyst Dominic O'Kane quoted in the Financial Times.
On March 4, it cost about US$29,000 to buy a ton of nickel on the futures market of the London Metal Exchange, the primary global clearinghouse for metal commodities. By the following Tuesday, the price had reached over US$100,000 per ton, amid massive market volatility.
However, it became apparent that it was not just concerns over Russia that drove the price up, but a massive effort to cover a short position from one of the world's leading producers of nickel.
Nickel had surged 250% in the lead-up to the suspension due to a short squeeze bet from the Chinese metals tycoon Xiang Guangda, the founder of Tsingshan, that prices would fall.
Guangda’s position was so large, and mainly held through derivatives contracts taken out with several banks, that the exchange could only see a fifth of the full position.
During the melt up, Tsingshan bought large amounts of nickel to reduce those short bets and its exposure to costly margin calls, according to the LME.
The exchange suspended nickel trading on March 8 for several days and canceled US$3.9 billion worth of trades.
According to a nickel expert quoted in the Financial Times, Xiang has one weakness, say industry hands: “The guy has an Achilles heel, which you often see among successful people in China: he loves to punt…I guess he felt that he was the most informed party in the market . . . and wanted to trade on that.”
While it is easy to forgive the folly of a badly timed trade, but when it is key players and key materials, major manufacturing gets disrupted.
All this left many users of the exchange with serious criticism.
The United Kingdom's Financial Conduct Authority and the Bank of England announced investigations into the governance, market oversight and risk management of the LME and its clearing house.
While, the International Monetary Fund said the London Metal Exchange’s governance systems need to be strengthened after the massive short squeeze.
The LME said it will also conduct an independent review of the events, in an effort to restore confidence.
It is the supply of metal in these warehouses that help determine the LME prices and organize delivery but they only work if people are using their system. There are over 500 LME-approved storage facilities in 32 locations across the USA, Europe and Asia.
The metal stored in these warehouses is often used as collateral in financing for banks and trading houses. But more importantly, they set the price, organize buyers and sellers, and deliver on contracts.
In wake of this drama, physical traders are turning their deals away from LME pricing where possible, while automakers are considering alternative sources for the materials to build their EV fleets, avoiding the volatility and responding to increased scrutiny from ESG reporting.
This has led to some creative deal making where companies are bypassing traditional middlemen and markets and dealing directly with the mining companies.
Volkswagen has been in talks with suppliers to secure direct access to raw materials for its electric vehicle batteries through partnerships.
The German carmaker is trying to exert more control over key components in its supply chain such as semiconductors and lithium so it can overcome any potential bottlenecks and keep its plants running at full capacity.
In typical Elon Musk fashion, Tesla led the way in showing a way to avoid market chaos. In 2020, Tesla CEO Elon Musk urged nickel miners to increase production as he saw the problem coming.
Vale is already Tesla’s main nickel supplier. But, the company also has signed a deal to secure nickel supply from a New Caledonian mine previously operated by Vale.
In addition, Tesla entered an agreement with a Canadian-listed junior miner Talon Metals for the supply and purchase of a nickel concentrate to be produced from the Tamarack Nickel Project in Minnesota.
All this bodes well for the mining industry and auto industry looking to secure stable supply of key materials for their EV supply chains. It is only a matter of time before geologists and mining companies become key partners in the electrification of ever