The Nickel Squeeze Still Has City Reeling

the London studio. This is in the City, Bloomberg's podcast, connecting you to the stories the heart of the City of London, and this week, Dave, we revisit the nickel squeeze back in March that threatened London's place at the heart of the medal's trade. Now, for centuries, the London Metal Exchange has been the home of global benchmark prices

for the world's key industrial medals. Right, but those chaotic eighteen minutes back in March that sent nickel prices soaring they have put the me's status as a key City of London institution in doubt. There are now questions being raised about its structure, its ownership, and in fact it's future. There are lawsuits piling up and market experts forecasting a mass exodus of ELAM members down the road. So joining us in the studio today is Bloomberg's Jack Farci, who

covers energy and commodities. Hi Jack, Hello, So Jack, are you able to give us, first of all a rough history lesson right, so help us understand how it started. It's one of the biggest exchanges in the world, certainly when it comes to metals. The history of the London Metal Exchange dates back to maybe the early nineteenth century when they used to gather in coffee shops around here in the city of London. They draw a circle in the floor and sawdust and then they'd all gather around

the circle and start trading metals with one another. That became more formalized in eight seventy seven when the London Metal Exchange was established. It's still with us today, even though the UK is around error in the global manufacturing economy now, but the London Metal Exchange is still where the world prices. And that was what I was going to ask you that you know, we're no longer that important industrial nation, So why does London continue to set

global prices for metals. London is is still a key financial hub for the world and then the other parties history, you know, I mean, there are lots of people who would love to establish metals exchanges to be the benchmark place for metals to be traded, But everyone's contracts have enemy prices in them, and that's very, very hard to change as long as you know, people are broadly happy to continue using the system that they know, which is the Enemy's pretty hard to rip up hundreds of years

of tradition and history and contracts, many of them that last fifty and twenty years, and suddenly switched it all over to a new way of pricing metals. Like some of the history around it, I mean, it's pretty some of the rules actually are pretty archaic. I think you could drink in the pit until until three years ago. Four years ago, well, the enemy only formally banned traders from drinking during the working day. Yes, I mean, it's it's one of the things that they weren't drinking, or

was it. I mean, well, I think it's possible that people might have gone out to lunch and had a few drinks and come back and traded in some cases, probably not In most cases. Well, I know from from some of the old timers that it used to be the case that everyone would smoke in the ring and there was an enormous ash tray in the middle of the ring. That they'd all flick their butts into this ash tray in the middle while shouting and making hand

signals and trading copper and tin. And I mean, that's the thing, is that the image of the ring is is so iconic, isn't it. There a crowd of shouting traders, token incomprehensible, really um, and you just say maybe with a cigy on as well. At the red seats or green seats, red seats, red, red leather, a red leather bench, which and so one of the arcake rules, which is which they exist, you're not allowed to stand up. You've got to keep not one foot grounded to the bench

at all times. And if you don't get fine, And obviously they shut down the ring throughout COVID obviously standing around and shouting each other not particularly COVID secure. But now it's back, isn't it. And there's been a debate about whether you even need this physical ring. But what's so good about it. Why the traders still like to

use that as a way of transacting. Part of it is because of the three month contract though instead of having each month having a contract, the Eleemy has each day has a contract, and then the benchmark price this three month changes every single day. So today it's the contract for three months time, but tomorrow it will be

one day later. And that creates this huge matrix of contracts that are quite complicated, and all the banks and brokers are always trading positions in between these different contracts. They argue that's pretty hard to achieve on a computer screen, and it's best done in the ring. Not everyone agrees, by by any means, but this is a debate that has been going on in the Eleemy for longer than

I've been covering it. Certainly, there's always one camp that says, let's get rid of the Ring, and one camp that says, no, it's necessary. And so far the argument has been made and the Leemy has been listening to it, that is that that the ring works and people like it, and so it's it's still with us, how's it possible? And they've had actually, you know, certain I guess events that threatened the stages through the years, but there's not a

real viable rival to the ELEEMY. Well, the biggest rival is the CME formerly comes in in the US Chicago. Yeah, but they only have really a copper contract. So that's a big rival for the ELEEMY and copper, but it's a pretty North American US focused contract. They're certainly trying to bring new contracts. They've got an aluminium contract now that's global, but it's you know, a rounding era compared

to the enemy's aluminium contract. And the other big rival is the Shanghai Future Exchange, which does a lot of volume in metals and is one of the big trades. Is people arbitraging between the price in Shanghai and the price and the LEEMY. But that's on shore in China and so it's not accessible to all global traders and that's a real barrier to it becoming the global benchmark contract. I think. So it brings us back to those famous

eighteen minutes in March where Nickel went crazy. That's been a huge story today to watching the l M actually stopped trading for for Nickel as its skyrocket over the course of two days. I mean, that's unbelievable. Had that massive surge in nickel prices that prompted halt and trading on the ELM. I've covered nickel now for seven years. I've just never seen anything like this. You had at

one point nicol rise by just today. You know, we had a price that was in the range of ten to twenty thousand dollars for a decade, and then suddenly, in the space of one and a half days, it went from just over a hundred thousand dollars. That's not something in anyone's model, and it's and and and it

more or less broke the market. We had a situation where the biggest company in the global nickel industry, company called Singshan, also the biggest stainless steel makers, stainless steel being one of the main uses for nickel, along with batteries for electric vehicles. They had built up this big short position in ellemy nickel. Essentially, they'd sold futures contracts

betting that prices would go down. They've done that over the end of beginning twenty two, thinking that there's going to be lots of production coming from Indonesia and that

would push prices down. Instead, car companies battery companies were getting excited about the electric vehicle revolution, buying lots of nickel, and and the world was worrying about Russia, and particularly after Russia invaded Ukraine, there were lots of concerns that Russia, that nickel coming out of Russia might be and commodities in general coming out of Russia, but particularly nickel would

be disrupted. So Nuel's Nickel, Russia's big mining company, is one of the biggest nickel producers in the world, and crucially a really big supply of nickel metal, which is the type that you can deliver on the enemy. And so the price of nickel was picking up. At some point on March seventh Monday, sing Shan stopped being able

to pay its margin to its brokers. So you know, if you have a short position you've been against the price and prices go up, your broker at some point gives you a call and says, hey, if you want to keep this position, you need to give us some more money. At some point, sink Shan stopped being able to find the more money. At that point things went a bit crazy. The price on that day, March the seventh Monday, went from about thirty thousand dollars to about

fifty tho dollars a ton. Until that point, Nichol had traded for ten years in a range of ten twenty dollars a ton. And then the market reopened overnight on March the eighth, and prices really went crazy. So in this eighteen minute period around six am on March the eighth, prices went from just about fifty thous dollars all the way up to a hundred and one thousand dollars. You mean, how long have you been covering medals? Have you ever

seen over a decade? No, nothing like it. I don't think I've seen anything like it in any commodity market. To be honest with you, it was the enemy's auctions after that huge spike, wasn't it that have really caused the biggest concern. The price hit this record high of a hundred and one thousand dollars, then came down to about eighty thousand dollars at that point that this is now about eight fifteen in the morning on March the eighth.

The Eleemy suspended trading and then crucially they canceled all the trades that had happened on that day on mark the eighth, about four billion of them re estimate and so took the price back to where it had closed

the previous day, which is forty eight thousand dollars. The effects of that was to say to all those people who had short positions, which was you know, sing Shan was the main one, and as a result sing Chan's banks and brokers, but also lots of other companies involved in the in the world of nickel trading, that you wouldn't need to make your margin calls on the basis of eighty thousand or hundred thousand dollar nickel, but you could do it on the basis of forty eight thousand

dollar nickel. So it was a big bailout essentially for anyone who had a short position, and consequently anyone who had a long position was was pretty cross. Traders were mental really because they could have made money, right and they put a position to make money and then effectively the element canceled it. Yeah, I mean there's been this huge backlash, particularly I think from the kind of US

fund world. Some of them, I don't haven't even lost a huge amount of money here, So I mean there are lots of ways you could lose money, right, You could have had a long position, been betting on nickel

price going up. You thought it was a hundred thousand as maybe you sold some contracts on a hundred thousand dollars and then the Eleemy tore up that sale, or maybe you were arbitraging between two different prices, you know, you had a trade going short nickel and long zinc or something, and then the nickel price got torn up.

Was crazy. Actually in all of it was that the Chinese nickel Taykoon, who was effectively almost bailed out, kept on saying no, no no, I'm holding onto their short position, right, yeah, yeah, I mean that has been the great, the great story, and the thing that has infuriated some of these hedge funds watching on from the sidelines is that, I mean, the Eleemy says that they intervened in the market not to bail out Singh Shan and its owners Shanganga, but

to bail out everyone else in the market who was at risk of going including in particular, you know, some of the smaller brokers who had clients who weren't paying their margin and who would have gone bust if the price had been eight thousand or a hundred thousand dollars, and certainly if it had been higher. But this drama that played out was in effect the enemy bailed out Singshan and Shangwanda and and all of its banks led by JP Morgan, but also a standard chart at BNP Pariba.

And and meanwhile, he has got out of it essentially. So over the past three or four months, he's largely got out of his short position at prices much lower than the fifty where the market was stopped, and certainly much lower than the eight or a hundred thousand where the market went to before the trades were canceled, making

a little loss but not a very significant loss. Meanwhile, you know, the likes of Elliott are saying that they've lost half a billion dollars on because of the enemy's actions. I remember actually speaking to a hedge fund at the time, and we didn't put him on air because he was I mean, there are a lot of exploits, There are a lot of expletives that cannot be repeated on the podcast,

so real anger. Right. You had a great interview fund seen with Ken Griffin where he said this was one of the worst things he'd ever seen in his career. You cannot do that in a market that is integrated with other markets. You know, what have you traded in the exchange that had a back back over the counter kind of tract. What if you were a producer selling your production forward and all of a sudden you find that you didn't hedge. I mean, there's all kinds of

adverse consequences that come from exchange. Is changing the rules of the road after the fat Yeah, because it puts in question actually what they'll do next time around. There was a great an article published by a fund called trans Trend, which is one of the big algorithmic funds trading metals, and they said this was effectively the enemy seems to have manipulated the market price down and the moment we realized what was happening, we felt we could

no longer entrust the enemy with our client's money. That's how a lot of funds saw it, and that's why it's such a big deal for the enemy. And now

we're seeing lawsuits as well. Right, so we've had Elliott, you know, one of the biggest hedge funds in the world, Paul Singers, Elliot Investment Management is seeking four and fifty six million dollars in damages from the l follows and also Jane Street, a big arbitrage have filed lawsuits or have filed this this thing called judicial review, challenging the leemy's actions and and seeking about half a billion dollars

from them. At the time, Jack, we actually thought that the chief executive would go of the eleemy, and we probably thought that a lot of the contracts were a lot of the money making would move elsewhere. It hasn't really well. The amount of trading on the enemy has come down in nickel very significantly, so the nickel volumes are down about a third since since all this blew up. Open interest is also at the lowest in about ten years,

so the nickel contract is definitely wounded. The rest of the eleemy has also seen a reduction, but not as not a very dramatic reduction in volume and open interest. I think the key issue is the one that I said right at the beginning of this conversation. There aren't very many alternatives. You know, if you want to trade a nickel derivatives contract, there's a contracting Shanghai, but if you're an international trader, that's not really accessible to you.

And so what do you do. You know, you can have a fixed price. You can you can decide, you know, if you're a nickel minor, you can sell it to your customer at a fixed price and say, okay, let's just call it dollars a tongue. But people don't like doing that. They used to having a floating price and hedging their risk and so and so. That's what the enemy is for. But Jack, that's in the mediate term.

I mean, are some of these other platforms abroad, be at Shanghai or New York or Chicago not building platforms to rival the elemy after this? I mean, can you just call it a huge mistake? I think they would like to. But the reality of building building a contract as an exchange that has that critical mass. The key things that people care about when they're trading futures contracts is liquidity, is the ability to get out of it. I mean, yes, absolutely, is whether they trust the exchange

to honor their contract or not. But if there is no alternative that has good liquidity and volume, there's certainly lots of people around who would like a new contractor trade, but it's not so straightforward to suddenly click your fingers and make it happen. And and the boss, the CEO of the Eleemy, Matthew Chamberlain, has been there about five years. I mean, ultimately has he taken responsibility for all this time or but he's still in his job. He has

and he is. We are absolutely mindful of the impact that this had had on so many people, and we need to make sure that it doesn't happen again. Um. He was due to leave, in fact, he announced his departure in January this year before all of this happened. He was due to leave at the end of April, but instead the eleemy's owners, which is Hong Kong Exchange and Clearing, Hong Kong Exchange, asked him to stay on. And he's now staying on indefinitely at CEO in order

to the mess. And in fact, rather than rather than leaving, he's actually he's actually renewed his contract and he's staying on and he's in he's disputing these these lawsuits against him. I think the Hong Kong Exchanges and Clearing have said in a state with the enemy, management is of the view that the claims are without merit and that the enemy is going to contest these vigorously. What chances have

they got of winning? Well, it's an interesting one. The Leemy is a kind of a slightly weird, weird legal legal situation where the Eleemy is considered legally as as an arm of the UK government because it performs this regulatory function over the market. And so the way to sue the Leemy, at least that people have done in the past and had success in the limited instances where

that's happened, is this process called judicial review. And really that focuses on how the Eleemy took the decisions, not really the rights and wrongs of what the decision was, but whether they followed the proper process according to their procedures when they took the decisions. So we'll see the Eleemy says, of course that they did follow the proper process. Their rule book allows them to do pretty much whatever

they like. If the Eleemy considers that the market is disorderly or is at risk of becoming disorderly or anything like that, they can take whatever actions they think are necessary in order to resolve the situation. So we'll see what comes out when when if we get to the point where we start seeing how the enemy's decision making process, you know, in the minut c I of it, the meetings of the special committees and boards and the minutes

of those what went into their decision making process. But I think that the assumption has got to be that they followed their procedures. Maybe not. You know, Russel took them to judicial review in two thousand and fourteen. I think and and was initially successful. So it's possible, but I think it's a long shot. Is their long lasting and irreversible damage to the reputation both of the enemy and their prospects, but also for the city of London as a whole, Yes, I think there is. I mean,

I think the short answer is the Eleemy. You know, for for for as long as I've been covering it, and certainly since it was brought by the Hong Kong Exchange, in has been trying to woo these financial investors, particularly you know, big US funds, and persuade them to join the physical market participants, the likes of Singshan, the big mining companies, the traders, the manufacturers in trading on the eleemy to boost volumes, to make the eleemy more profitable

as a as a business that's going to be an extremely hard argument to win now that they're also furious with the ELEEMY, and it's gonna be very hard to persuade them to trust the ELEEMY again with its current ownership and its current governance structure. I mean, and you've seen, you know, people like the I M F No Less have been calling for reform of the eleemy's government structure. I think it's a big issue. I don't see an

easy way out of it. The ELEEMY has put in place already a number of reforms to try and prevent

something like this happening again. But the key question as it relates to how the ELEEMY got itself into this situation and the lack of trust in the people making the decision, which now all of these hedge funds feel, that's hard to resolve without without a meaningful change, without probably changing the whole government structure and pay possibly the ownership, which so far, at least, people haven't been talking about Hong Kong Exchanges hasn't been hasn't hasn't suggested that they're

they're interested or willing to sell Jack. How do you tell the professionals with the wannabes London Metal Exchange, London Metals Exchange. That's a no no, it's the London Metal Exchange. Anyone who pulls it the London Medals Exchange does not know the metals markets. Literally, Jack Jack said, if you call it metals, I will walk out. Thank you so much, Thank you Jack. I'm David Merritt and I'm Francine black One. That's it for this week's episode of In the City.

We will be back next week and in the meantime. If you like the show, please rate it and check out the Bloomberg UK website for more news and use special thanks for our guest Jack Fergie. This episode was produced by Summerside and said her say yeh