This article was written by Martin Hayes. All views and opinions expressed are strictly his own.
In a few weeks’ time a new online physical nickel trading vehicle will be launched, enabling producers, users and merchant middle-men to trade directly with each other, potentially challenging the LME, which for over 40 years has had a hegemony of the pricing/hedging space in this metal.
Global Commodity Holdings (GCH) plans to introduce sometime in Q1 a refined Class 1 nickel metal index, encompassing briquettes and full-plate cathodes, arriving at a daily settlement price derived from orders and business across the front two months.
By excluding the high-end speculative HFT and algorithmic traders, who arguably can have a distortive impact on the pricing process, this platform, in theory, will be more attractive to the physical sector, who have been bruised and, in some cases, put off engaging with the LME market in the wake of 2022’s March price spike crisis.
Turmoil back then resulted in a sharp price explosion to $100,000 per tonne, the threat of unmet margin calls, market suspension and controversial trade cancellations. Legal action is ongoing and some of the various outside probes have yet to report – all of which has shattered confidence and involvement in the LME nickel contract.
GCH, previously known as Global Coal, is essentially replicating its existing globalCOAL trading platform, whose members include companies such as BHP, Anglo-American, Glencore and Trafigura, who all operate in the nickel market.
Eventually, a spot index could be licensed out to a regulated futures exchange, with the subsequent development of a forward curve. A GCH subsidiary already does this now, with a thermal coal index traded and cleared on ICE (Intercontinental Exchange).
All of this depends on the index gaining acceptance from the physical community, developing business and liquidity and then, ultimately for GCH, take-up by another exchange.
This may not be a ‘given’, however, because as has been seen in the last 25 years or so, the LME has faced periodic threats to its position as the world’s largest metals market, and premier pricing vehicle from what were at the time equally enticing rivals.
The dotcom boom at the turn of the millennium ushered in firstly Spectron, whose simple screen-based version of its existing oil trading vehicle perhaps persuaded the LME to launch its first version of Select in 2001.
A more serious competitor was EMETRA, launched in early-2000, whose staff were metals industry veterans – it was another online proposition with warehousing ambitions as well. It never got off the drawing board and foundered in April 2002.
Much more recently in 2017, NFEx, another screen-based exchange, again including metals industry veterans, looked to tempt players away from the LME, which had hiked its trading fees sharply in the wake of its sale to HKEX in 2012.
But its viability was fatally dented when the LME both reduced its fees and declined to offer clearing facilities – NFEx failed to get off the ground in 2018 as intended.
Even though long-established existing competitors CME and SHFE have not stepped into the breach as an alternative, this time round the LME may find it harder to see off GCH for a variety of reasons. Since March 2022, trading volumes have slumped in nickel, while the contract specification itself does not now fully reflect industry practice – remember Tsingshang, whose massive short position caused the market meltdown, does not produce a deliverable product.
And there is a yawning gap in the time when the Select screen is open for business, which means the Asian market has nowhere to go for most of its trading day. Instead of starting at 0100 UK time, Select is not open until 0800 – and it appears the LME may not get the regulatory go-ahead while the SFA and Bank of England reviews remain ongoing.
So, quite a while until LME nickel is fully-functional again, and conceivably there is a lot at stake here. Although nickel is one of the LME’s smallest long-standing contracts, if an alternative gains traction the next rival off the blocks may well be offering a choice in one of the bigger metals.