Nickel fiasco followed by independent investigations. Exchange opened, but trading only slowly resumes. Appropriate steps only effective together with the right communication.

US-President again relies on the Defense Production Act. This time, it is about battery raw materials and not respiratory apparatus. Dependence on unreliable foreign sources should be reduced.

Despite flattening growth in steel production in China, supply deficit of iron ore. The many other people in Asia should not be forgotten. Decarbonisation necessitates special grades of ore.

In regard to climate effects, the right things are not always compared. Instead, claims of climate neutrality are eagerly made. Only at the end of an era will it be seen what has changed and what has not.

Wound licking is called for
A month has now passed since the questionable events on the London Metal Exchange (LME). The LME nickel market was reopened after the temporary closure, and after some initial stutters, prices were also agreed again in Exchange trading. Since the 28th March 2022 there have been regular daily fixings which serve as a price reference for the industrial value chain. Since then, the nickel price has been quite stable, moving in a range between USD 32,000.00/mt and 34,000.00/mt. Certainly on a high level, but in view of the war in the Ukraine and existing and potentially further sanctions being made against Russia, the aggressor, probably in order. So far, so good.

Whilst it took decades for the LME to build up trust in itself and the individual contracts, just one and a half days were needed to significantly deplete this trust, and basically call it into question. And not just from market participants from the real economy, but also from the financial world and from speculators. Unfortunately, the Exchange reacted too late where the suspension of trading was concerned which rather maximised the problem and loss of trust. Almost all stakeholders were in panic mode. Correspondingly, the loss in trust is reflected in the significantly lower daily trading volumes.

This incident was presumably caused by a malfunction in the LME (and it’s clearing house LME Clear). In this respect, the announcement of independent investigations into the events can only be welcomed, by an expert commissioned by the LME itself along with a joint investigation by the Bank of England and the Financial Conduct Authority (FCA). The latter is quite unique for the London financial centre. This shows just how much is at stake for all those involved. Therefore, above all with a look to the future, it is about ascertaining which instruments can be used and which measures can be taken to exclude such far-reaching market turbulences with certainty.

However, it is also about misconduct and possible sanctions, for, as well as the LME and LME Clear, and also the BoE and FCA, possibly some market participants, perhaps even the media, may have played outside the existing rules, or at the least acted without any sense of proportion. For example, it has to be asked where actually the data has landed from the EMIR reporting, which was introduced by legislators after the Lehman crisis in order to give better transparency in derivative transactions. These could have provided clarity for all those involved about the size of the dominant position (also over-the-counter), as the LME was probably ultimately only the tip of a huge iceberg. Or has everything just been a data graveyard?

This will have to be shown in analysis. Results of this should be published in detail, as otherwise there will be no confidence left at all. This confidence does not just apply to the nickel market and the other contracts on the LME, but also to regulators and the financial centre of London in general. This does sound actually worse than it really is. The broad concern, publicity and significance which the fiasco has caused should ensure the necessary seriousness, speed and even usefulness of the results of the action.

In at least one point though, the LME has to be defended. Interestingly, those complaining the loudest about the suspension of the nickel market are those who up to now have neither used the LME for hedging nor for speculation. They had been happy to use such an internationally recognised reference for their own business transactions, without, however, actually contributing to the liquidity of the LME, which is the basis for the formation of prices on the Exchange to be in line with the market. Only the broadest possible mirroring of physical transactions on the Exchange, through physical nickel buyers and sellers (and here corresponding non-Exchange nickel substitutes are also included), can ensure a high quality in price determination. It was rather much easier to have such an internationally recognised reference price. As has been often reported here, the quality of price formation is, above all, ensured by the largest possible reflection of the physical business, determined by supply and demand of Exchange traded nickel and also corresponding substitutes.

However, from the time the nickel contract was created, doubts have been made about its continuous representative nature. At times temporary distortions were seen to occur, but they were manageable. Therefore, the call can only be that if the exchange can finally once again win back confidence, then more participants than ever before should return to the Exchange in order to sufficiently weaken the influence of individual big players in a relatively small market. However, positions must also be regulated by appropriate maxima. Ultimately, the courage of a person or a group of responsible people has to be expressly praised when it puts an end to artificial business, even if too late, but probably not too late, so spoiling the dealings of a not too small group of speculators. But without a doubt, worse things could be prevented.

Yet to win back confidence and the return of market participants to the Exchange, not only appropriate steps need to be taken, which will prevent history repeating itself, but also, above all, there has to be a credible communication about it. This is not reached via anonymous publication of notices on the LME website which are then forwarded on by paralysed brokers and banks as members of the Exchange. In point of fact, the LME itself and the regulators have to make the way forward together and speak with the principal market participants and do this on a personal level.

If it is possible to convince individual players of the quality and effectiveness of the measures, and “testimonials” can then be possibly used publicly that confidence has been restored in the LME, then there is nothing to stop a revival of the futures market on the London Metal Exchange. An international reference price still has great advantages and justification.

US President Joe Biden: Supply chain of battery raw materials is important for the national security
According to the White House in a policy statement of the 31st March 2022, the US President, Joe Biden, recently invoked the Defense Production Act in order to encourage domestic production of battery materials. The Defense Production Act basically gives the President the authority to order the private sector to produce goods which the government needs in times of crisis. In this case, the measures are justified on the grounds of national security and the development, or the protection of critical domestic infrastructure. In this way, President Biden recognises the strategic importance of industrial metals, which include, amongst others, nickel, cobalt and lithium.

In its statement the White House declares that the United States of America is currently dependent on literally “unreliable foreign sources”, in order to obtain the coveted raw materials. The term “unreliable foreign sources” is the diplomatic way of referring to China, according to the information service Reuters. The New York Times reports in this matter that it has learned from insiders that the planned measures are not about loans or direct purchases, but about the financing of studies and the expansion or modernisation of sites.

Whilst the dependence of the USA on China in certain areas is not a new problem for Americans, the war in the Ukraine will, however, have caused more unease for President Biden. The importance of Russia may be limited for the materials of lithium, manganese and cobalt, but for nickel the impact is much more serious. About 10% of global nickel production comes from Russia.

Originally the Defense Production Act was established by Congress under the then President Harry S. Truman, in order to promote US steel production during the Korean War. However, the law has been activated on a number of occasions in the past, also including during the Trump presidency in order to resolve the supply chain problems in the production of respirators and to ensure production of additional face masks. The misappropriation of the law by Ex-President Trump caused much consternation amongst many politicians and business representatives.

Possible structural supply deficit in iron ore
A few weeks ago in the news portal Reuters, the columnist Clyde Russell highlighted possible structural shifts in the iron ore market and the effects this would have on steel production.

China is mainly the focus for iron ore price development in the short and medium term as the country buys almost two thirds of the world’s exported iron ore, and has half of the global steel production. So far iron ore supply could match the growth of steel production. The columnist notes that there was just some turmoil at times with supply chain problems caused by the coronavirus or natural catastrophes.

Russell expects that China will have reached the pinnacle of its steel demand by the middle of the decade. After this time, Chinese steel production should slightly decline which would have a direct influence on iron ore demand. However, there are still another two billion people in Asia who would like to increase their standard of living. There is then the danger that investments of large mining companies are not enough to cover the demand in the other Asian countries. Possibly too, shareholders will be wary of further investments as they can remember only too well the low price levels of about ten years ago.

He names the second factor for the uncertain future to be decarbonisation. At the moment the iron ore production process for steel is energy intensive and blast furnaces are run on coking coal. Higher grade ore could, in the future, have a significant influence on energy consumption. If energy costs for steel production continue to increase, as for example due to the CO2 price, the iron ore market could split into two, in high grade ore and iron ore of a lower grade. The author says that high energy costs could justify a price premium. In addition, the energy transition is increasing the importance of directly reducing iron ore in production methods, in which new steel is produced in an electric arc furnace by using electricity. Also in this latter method, higher grade iron ore is needed, which would have the consequence of big mining companies having to make necessary investments.

In this way, by making the necessary investments, mining companies would ensure that the steel branch worldwide would not suffer from a structural iron ore deficit.

Golden Cream Puff (without the cream)
Since 2009, the Foodwatch organisation has been awarding a negative prize “the Golden Cream Puff” for the most blatant advertising lie of the year. The German retail group Rewe is the present recipient of the prize, for its chicken breast filet which was supposedly produced in a “climate neutral” way. Foodwatch writes the following: “With its advertising, Rewe gives the impression that the production of the chicken does not have any harmful effect on the climate. In actual fact however, the chicken breast filet is neither produced emission free nor are the CO2 emissions off-set during production”. It goes on to report the pertinent fact that actually 3.5 kilograms of CO2 are produced for every kilogram of poultry.

Gabor Steingart writes in the Morning Briefing that, contrary to the above, a modern VW Golf emits about 120 grams CO2 per kilometre driven, which already earns him the next “Golden Cream Puff”, for how on earth can a kilogram of poultry meat and a driven kilometre be put into any meaningful perspective. Or does it help anyone to know that 120 grams are less than 3.5 kilograms or that for one kilo of poultry meat 29.2 kilometres can be driven. As it is also not really too well known by the common public, it would have been much better for the Morning Briefing to have reported that the use of 1 kilogram of stainless steel scrap in the production of new stainless steel saves (!) 4.3 kilograms CO2, and even also conserves finite resources. In 2018, for example, by using scrap in steel and stainless steel production in the EU emissions amounting to 157 million tons CO2 were eliminated.

Golden Era in retrospect
In retrospect, all that glitters is not always gold. The long era of Angela Merkel’s chancellorship is, in the meantime, viewed in a quite differentiated way, also by former supporters. This is not about party politics here, but about generally valid principles, which could serve as a guideline on many occasions. Standstill and preservation is comfortable, for then nothing much really can go wrong, but standstill is also very dangerous.

If one takes the state of digitalisation of the German federal, state and local authorities, and also the expansion of the mobile networks and fast internet, then it is obvious what is meant. Also the Russia policy has shown a deceptive continuity, about which Merkel’s successor can whistle a quiet tune. Certainly it is always then better to act, rather than react and this is also valid for many companies in this country. However, when action is taken, then this should not be done frantically and out of panic, as then we would be back again in the aforementioned era.

The withdrawal from nuclear power against the backdrop of the Fukushima reactor catastrophe or the uncontrolled migration movements are accordingly certainly rare events, but all the more serious examples. Only during the financial crisis could lethargy be personified, in a duet with P. Steinbrück, and actually prevent a run on the banks by just remaining calm. Or was it perhaps Mario Draghi with his bazooka? Just a few words describe which parameters are needed for action: initiative, analysis, creativity, decision and also responsibility. But, there are such a large number of people, not just politicians (of any gender), who have a problem with the latter.

On that note, we wish all our readers, if maybe not a golden, but certainly a happy Easter time.


LME (London Metal Exchange)

LME Official Close (3 month)
April 13, 2022
  Nickel (Ni) Copper (Cu) Aluminium (Al)  
Official Close
3 Mon.Ask
LME stocks in mt
  March 21, 2022 April 13, 2022 Delta in mt Delta in %
Nickel (Ni) 73,632 72,858 – 774 – 1.05
Copper (Cu) 80,150 107,000 + 26,850 + 33.50
Aluminium (Al) 704,850 612,275 – 92,575 – 13.13

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