Casino Royal or Casino Metal?

LME nickel market urgently needs liquidity
The London Metal Exchange has always been known, if not to say, has been notorious for its volatility. Some even describe the LME as a “Casino”. But the matter is not so simple for there has never been any better alternative so far. The market for primary nickel, especially in the form of brands which are approved on the LME (so called Class 1), is relatively small. Therefore, it also reacts with significant price fluctuations, the same as in other tight markets, to large and numerous single transactions in the same direction. Considerable price fluctuations of over USD 1,000 or more per ton nickel in one day have also not been too seldom in the past. For example, on 10.02.2012, the daily high was USD 21,700/mt and the low was USD 20,640/mt; or on 05.05.2010, when the 3 months nickel future price started at a high of USD 24,625/mt and reached USD 20,700, the low of the day. In general, the absolute fluctuation in US-dollar per ton is greater at higher price levels with the same volatility.

This is basically no different on the Shanghai Futures Exchange (SHFE), where companies registered in China can trade primary nickel. More exchanges would fragment the original liquidity even more, a result of the size of the physical market paired with the interest of investors, and would probably also reduce the market depth. Also, the ambitions of the Chicago Mercantile Exchange (CME) to perhaps introduce a nickel contract would, in this context, not be any help. It would not be of much benefit to split the market into nickel for battery use and one for other applications. A further reduction of exchange liquidity in the individual segments would be the consequence.

Apart from this, all physical market participants want a functioning exchange market, independent of which industry they work in and this also applies, with minor exceptions, to investors and speculators. Why the LME now wants to once more allow trading in the Asian morning hours just when it is almost year end and trading is quiet over the holiday (see below), is hard to comprehend. The existing volume would just be spread over more trading hours. Whether this would be compensated by additional business is, however, very questionable.

Perhaps Exchange liquidity could be increased by making more, or other, nickel products as the base on which the nickel future is traded on the LME. For in the meantime, nickel raw materials, which are not permitted on the Exchange (ferronickel, nickel pig iron etc.), including nickel containing stainless steel scrap (so called Class 2) would make more nickel units available than through Class 1. But then the problem would be that the Exchange would have to provide or trade appropriate “conversions” between the different products. Probably also not very viable. It is, however, clear that the LME is needed as an internationally recognised price and hedging instrument for nickel containing raw materials as it was until the beginning of March 2022. But is has to be ensured that dominating influences cannot continually interfere and that the depth of the market can significantly increase again.

As well as a return of old market participants and a gain of new ones, perhaps a downsizing of the market by restricting the admission of new market participants and their maximum positions could be a way out of this plight. All of this is being intensively analysed by the Exchange itself, by internal and external consultants as well as by the responsible supervisory authorities, the Bank of England and the Financial Conduct Authority. And the publication of first results is, by all accounts, imminent. But this alone is not yet enough for a return to normality. In addition to urgent improvements in regulations and procedures, trust has to return. The LME cannot manage this on its own, but has to rely on the support of all industries involved with nickel, if the nickel contract is to be maintained in a better form and the LME can be kept as a whole. This does not yet seem to be obvious to everybody. The termination of the LME nickel contract would be a declaration of bankruptcy for the Exchange as a whole and probably also its demise.

In the weeks since 14.11.2022, the 3 months nickel future on the LME has traded in range between USD 24,625/mt and USD 33,575/mt. On several days the gap between the high and low was USD 3,500 per ton and more. In such a short time span this is far too much and shows that the market is not functioning.

Guest contribution
For the Christmas edition of Oryx Commodity News, Birgit Guschall-Jaik (referent bvse e.V.) and Kilian Schwaiger (managing director VDM e.V.) have written an exclusive article about the amendment to the EU Waste Shipment Regulation, for which we greatly thank both authors:

European Parliament’s Environment Committee has voted on a waste shipment regulation.

The efforts of the recycling industry to steer the upcoming amendment to the Waste Shipment Regulation in a sensible way have cleared the first hurdle. On 1st December 2022 the European Parliament’s Environment Committee voted on numerous amendments to the existing Commission draft. The report presented by the rapporteur Pernille Weiss (EPP) was approved by 76 committee members; there were no votes against, but 5 abstentions.

The confirmation of the export ban of plastic waste to OECD and non-OECD countries and a further tightening for the shipment of plastics is judged negatively. Some amendments, detrimental to our industry, were, however rejected by Parliament. For the metal recycling industry it is to be emphasised that parliamentarians voted against an obligation to keep metal waste in Europe. This happened despite massive lobbying from the European steel industry, whose interest groups, even shortly after the vote, were once more repeating the same old story about high scrap export volumes.

At this point we would like to stress that so far, there have been no European steel or smelting works which have been unable to produce because of a lack of scrap. The amounts which have left Europe were simply not in demand and could, therefore, contribute to the worldwide reduction of climate damaging carbon emissions in the recipient countries. It is more than surprising that EUROFER compares the export of metal scrap with a shifting of environmental problems to third world countries, yet at the same time emphasises the importance of scrap usage for the green steel industry. The dubious nature of this approach and the hypocrisy of the argument seem to have been noticed by one or the other parliamentarians.

Nobody wants to deprive its most important customer, which is and will remain the European steel and metal industry, of its important iron carrier, metal scrap. The actual EU (27) scrap figures of up to September 2022 also show that the export volume has fallen by 9.7% compared to the previous year, while crude steel production has fallen by 8.2 percent. Obviously plants tried much harder than in the previous year to use the important secondary material scrap, which makes the steel industry greener very quickly and without having to make extra investments.

Table 1: Crudesteel Production and Scrap Consumption in Mio. t

Joko Widodo touts for German car manufacturers
In October the Indonesian President Joko Widodo gave an interview to the Handelsblatt and was openly touting for the German car industry to invest in his country. He presented his vision of his country having a complete nickel ecosystem in the future which would range from raw material extraction to the finished electric car.

In the interview the journalist also touched on the problematic carbon amounts in the Indonesian nickel industry which have been long criticised by environmentalists. However, the Indonesian head of state did not address this problem directly with his answer, but referred to the jobs and added value that his country owes to its wealth in nickel.

Rising interest rates can lead to a raw material scarcity
About one hundred years ago, the economist Arthur Hanau wrote about the problem of time delay in adjusting supply in a market. If a market where supply meets demand in price, is thrown out of equilibrium, then this is called a demand shock. This can, for example, be caused by an increase in population.

As a consequence of such a shock Hanau observed higher prices for pigs. Since supply could not be quickly increased, as there was a waiting period for the pigs to be reared, prices went higher in the short term. The higher prices made it attractive for animal breeders to invest in capacities, but this, however, brought the danger of an excess in production. If there was excess production, the pigs were offered at lower prices. Because of falling prices, pig rearing was cut back, which in turn led to a scarcity in supply and the cycle began once again. Hanau named this phenomenon the pig cycle.

The origin of the problem is the long waiting period for product supply, which is why this phenomenon can be carried over to other areas, such as, for example, the job market for teachers. The news outlet Argus Media recently wrote about the consequences of low investment in mining. Companies, especially those who mine fossil fuels, have had much more difficulty in raising capital than twenty years ago. This is partly because of return expectations of investors and rising project costs, but also because of fulfilling ESG (Environment, Social, Governance) criteria. In the medium term, according to the journalist of Argus Media, reduced investments, also in the wake of rising interest rates, could, therefore, be the basis for a new commodity cycle.

The end of zero-covid could fuel inflation
While most countries around the world accept corona infections in the meantime in their populations, and, therefore, have weighed the damage caused by corona against the consequences of the measures, China had so far stuck to its zero-covid policy. For some weeks now, there has been speculation and even official announcements that China could soon say goodbye to its zero-covid policy, which did meanwhile boost the Chinese stock market, yet it is still not completely certain, as infection rates are now rising rapidly which can be of no surprise.

Should China become fully open again permanently, according to Goldman Sachs economist Dom Wilson, global inflationary pressures will increase. China’s opening fuels demand for energy and raw materials, which would lead to rising prices.

AISI publishes guidance on calculating greenhouse gas emissions
The American Iron and Steel Institute (AISI) has published a guidance on calculating greenhouse gas emissions, which has the aim of generating uniform data throughout the industry. On the one hand the institute wants to remain transparent and exact, and on the other hand, a consistent set of data for steel production should support political and other decision making processes on climate protection measures.

One of the most important recommendations of AISI for calculating greenhouse gas emissions is a “Cradle-to-Gate” method, i.e. all processing steps in steel production are taken into account. Therefore, primary products, energy emissions and transport costs are included in the calculation. In other words, it starts with the extraction of the raw materials (cradle) and ends with the finished production leaving the works (gate) of the manufacturer.

LME hopes to soon once again allow nickel trade during Asian trading hours
Since the short squeeze and the subsequent suspension of the LME nickel future last March the LME restricted nickel trade to just London trading hours. Other commodities could still be traded in the early morning hours in Europe. At the time the LME justified the restriction by the low nickel liquidity in order to concentrate this within London trading hours and to return it to comparable pre-suspension levels.

The speaker of the LME has already repeatedly stressed that they are optimistic in being able to resume nickel trading in Asian trading hours soon. Recently Robin Martin, the LME Head of Market Development, according to media reports, expressed his hopes that early morning trading would be allowed again within the next two weeks. It remains to be seen whether the LME turns the announcements into action, as Exchange liquidity may have improved again, it is still far below the pre-crisis levels.

Dam break in New Caledonia leads to price hikes on the LME
On Monday, 14.11.2022, nickel prices quickly and rapidly rose on the LME and reached a daily high of 31,275 USD/mt. On the Friday before the closing price had been USD 28,840/mt with significantly lower price volatility during the trading day.

It did not take long before the various information service providers started to speculate and report on the possible reasons for the price jump. A dam at the notorious Goro nickel mine had started to leak, so that the nickel output had to be reduced. This mine has already made several negative headlines in connection with uncontrolled discharges of wastewater.

Until last year Goro nickel mine belonged to Vale mining company, which also owns the iron ore mine, which cost the lives of 270 people in Brazil after a devastating dam collapse in 2019. Last year Vale sold its New Caledonian share to a consortium made up of employees, the local government and the commodity trader Trafigura. The consortium is, in the meantime, a raw material supplier to the electric car manufacturer Tesla.

And this ends the last report of the year. We look forward to continuing in the coming year and hope you have enjoyed the reading matter. We are always happy to receive any feedback. We wish all our readers and their families a Merry Christmas and all the very best for the New Year. Stay healthy and we hope to see you again next year.