Why was the 'rewinding of transactions and price range restrictions' implemented due to the turmoil in the nickel market triggered by the Russian war?

Nickel prices soared on the London Metal Exchange (LME) on March 8, 2022, causing market turmoil, and in response LME rewound several hours of contracts and traded nickel. We have also introduced a price range limit for . While criticisms have been raised about the LME's response, economic blogger Michael Frank Martin explains why the LME has taken an unusual response, including the role the exchange plays in determining market prices. I am explaining.

Decoupling in the Nickel Market

Nickel prices for the past 10 years have been in the range of $ 10,000 to $ 20,000 per ton, and fluctuations in nickel prices in one business day are also several hundred dollars per ton. It seems that about 10,000 yen) was common. However, the situation changed completely due to Russia's invasion of Ukraine, the world's third largest producer of nickel, and after the invasion, nickel prices were on the rise due to supply instability.

And a dramatic surge in nickel prices began on March 7, and despite hitting record highs at 5:42 am on the 8th, another $ 30,000 in the minutes that followed. (Approximately 3.6 million yen) also increased. After 6 o'clock, it exceeded 100,000 dollars (about 12 million yen). As a result, many traders betting in the opposite direction suffered heavy losses and the LME was forced to suspend nickel trading for the first time in about 30 years. In addition, the LME has announced that it will ' cancel all contracts for several hours before the suspension of trading ,' and has set a daily price limit of 15% to stabilize the market after resuming trading on March 16.

The Devil's '18 Minutes' Staying in the Head-Nickel Market Crisis, Surviving Companies-Bloomberg

One of the causes of the price surge is the transaction of a Chinese company called Aoyama Holding Group , the world's largest nickel producer. According to Martin, Aoyama Holding Group plans to make a huge capital investment to expand its production capacity and increase nickel production in 2022 by 40% from 2021. However, if production is increased without increasing nickel consumption, nickel prices may fall and the cost of capital investment made may not be recoverable.

Therefore, Aoyama Holding Group took a ' short position (short sale) ' to profit from future price declines in order to curb losses due to the fall in nickel prices. A short position is to sell stocks and financial products that are expected to decline in the future in the form of borrowing from others, and buy them back at some point in the future to repay them. If the price drops at the time of repurchase, the difference will be profitable, but if the price rises, the difference will be a loss.

In the case of Aoyama Holding Group, if the nickel price rises in the future, profits can be expected from the increase in production volume, but even if the nickel price falls, the loss can be suppressed by the short position. It is common for manufacturers to take short positions to prevent bankruptcy due to sudden price movements in their products, and Martin emphasizes that 'it was no mistake that Aoyama Holding Group took a short position.' .. However, the surge that occurred in the LME nickel market this time was an unexpected scale for Tsingshan Holding Group.

When the market price of a product soars, the holder of the short position of the product is required to settle a short position or a deposit called '

margin call (margin request / margin) '. Margin calls also occurred in the LME nickel market, which showed an unusual surge of 250%, and the Aoyama Holding Group suddenly paid billions of dollars (hundreds of billions of yen) of margin or 10 billion dollars (1 trillion yen). ) I have been required to hand over a unit of nickel and cancel the position.

No matter how much Tsingshan Holding Group is the world's largest producer of nickel, we do not have hundreds of billions of yen in cash. In addition, nickel is an important raw material for electric vehicle batteries and other industrial products, and nickel produced by Aoyama Holding Group has already been contracted to sell to these manufacturers, so we will hand over nickel to cancel the position. It is also impossible. As a result, Tsingshan Holding Group was in danger of bankruptcy. It was not only Aoyama Holding Group that fell into the same situation, but other nickel makers and traders also faced margin calls that exceeded the reserve fund.

If nickel manufacturers such as Aoyama Holding Group go bankrupt, the entire market will be in turmoil, and the sharp rise in nickel prices will damage many fields such as electric vehicles and gas turbines, resulting in the consumption of purchasing products and services. The burden is placed on the person. While financial market players could benefit from this scenario in the short term, Martin said it would have a long-term disadvantage as the market itself would be severely damaged. The consequences of this surge are tragedy for most stakeholders.

Therefore, LME took the response, 'Cancel the contract on March 8, suspend trading until Aoyama Holding Group can negotiate financing, and set a price range limit even after resuming trading.' Some people have expressed dissatisfaction with the LME's decision: 'The price that the parties consider to be'justified'for a product is the market price, and exchanges intervene in it or set price limits. It is strange to keep trading at 'unjustified prices'. '

But Martin argues that the LME's decision is understandable from the idea that 'the market is the mechanism that synchronizes production and consumption.' Market prices can clearly deviate from supply and demand when speculative purposes or panic of stakeholders are involved. Under these circumstances, Martin explains that it is necessary to temporarily suspend transactions and limit the volume of transactions while approaching market prices where supply and demand match. Based on this, the market price on March 8 clearly did not reflect supply and demand, so the exchange LME was responsible for bringing prices closer to the right ones.

This surge has occurred in the nickel market, which is important for various industries, but the same can happen in other markets as well. Martin suggested that even in markets that are closely linked to people's lives, such as energy resources and food, it is dangerous for prices to be too fluid, and in some cases measures like the LME may be needed.

in Note, Posted by log1h_ik