Not yet a 21st Century Tin Crisis?
Updated: Jan 16
This article was written by Martin Hayes. All views and opinions are strictly his own.
Those of us with long memories will recall when the LME last suspended one of its key metal contracts – the October 1985 halt in tin trading, which rocked the exchange to the extent that its very existence was thrown into doubt, but which subsequently ushered in deep structural changes.
This time around it is nickel where the LME stopped business after an almost unbelievable 250% jump in price to $100,000 in just over a day from last Friday’s level around $29,400. The price is now frozen around $80,000, while all the trades transacted between 01:00 and 08:15 local on Tuesday have been cancelled.
However, this is not a Groundhog Day for the LME, as unlike 1985, it is a very different institution and should be better able to cope with what will most likely be the biggest challenge it has faced for many years.
A replay of the long-drawn out Tin Crisis seems unlikely, and not just because the LME is now a fully-cleared market. Back then, the fear was that one default in a principals’ market would set off a cascade of failures.
Now, the aim is to get business up and running as soon as possible – unlike tin, which did not trade on the LME again mid-1989.
But how did we get here? After all, nickel was just one component in the wider ‘Manic Monday’ – March 7 was perhaps one of the most volatile and, at times, panic-stricken days the world’s financial markets have witnessed for many years.
Against the backdrop of the escalating Ukraine/Russia war, and conflicting stories on whether Russian oil and gas exports would be banned, equities plunged all around the globe, with some officially entering bear markets, crude oil soared, as Brent hit $139 a barrel at one point, while gas and wheat prices also soared – the former from levels that were already stratospheric.
Unsurprisingly, safe-havens were sought, with the dollar and the Swiss Franc gaining. Gold popped above $2,000 per ounce, with an eye on 2020’s all-time high of $2,075.
It was all action on the LME as well, and copper sprinted to a record $10,845, aluminium likewise set its best ever at some $4,000, although it was nickel that was the stand-out, hitting what was then an all-time peak of $55,000.
Days like Monday used to be few and far between, but in an age of globalisation and financial inter-connectivity they are now occurring much more often, as events such as 21st century geo-political tensions, 2008’s financial meltdown and the Covid pandemic mean no sector is immune.
So, after a day of some vicious fluctuations, on Monday evening the LME stepped in to inject some order to the cash market – not just in one metal, but across the board in all the physical delivery contracts – backwardation limits and deferred delivery.
That might have sufficed for the main contracts, but not for nickel, which was gripped by widespread panic, volatility and extreme price moves in Asia on Tuesday, resulting in the early-morning trading halt.
News reports suggested that a Chinese broker bank, operating for producer Tsingshan was having difficulties meeting its margin calls, contributing to worries about trading a metal that may be sanctioned, short covering in a market where liquidity was drying up, screen-based algorithmic business, coupled with pulses of delta-related hedge buying as upside options came into play.
Late on Tuesday the LME said that given broader uncertainties in the wider market, geo-political tensions and rising prices it would not re-commence trading until March 11 at the earliest, coupled with a package of measures.
Among these are the imposition of limit-ups and limit-downs – no moves above or below 10% of the March 7 close. Additionally, there is also the possibility of large long and short holders being able to net off positions at an agreed price.
If this happens as planned, there should be a resumption of trading on all platforms, speedily establishing a true and transparent price. That is important for the LME in preventing a disorderly market tumbling into crisis.
The longer the LME nickel market remains closed, the more opaque its price will become. Given that nickel’s use in EVs is set to grow, it is not desirable for a metal that is key in the green revolution to be subject to the vagaries of off-market trading.