Zero sum game

Black swan in the nickel market
The party atmosphere in nickel on the London Metal Exchange (LME) came to an abrupt halt on the 25th February 2021. Within a few minutes the nickel price dropped from USD 19,900/mt to USD 18,700.00/mt, when it had actually been on the brink of breaking the psychological barrier of USD 20,000.00/mt on the upside. An intraday loss of USD 1,200.00/mt, minus 6%, is a moment, like a bolt out of the blue, which even a long-term market participant does not experience very often. This raised, therefore, the suspicion that fundamentals were not the reason. It could rather be something which is not quite right, as all other financial and commodity markets were behaving quite normal. The stock markets were even still on their way to new highs. The movement could therefore be only traced back to the nickel market, but without any plausible cause in sight.

Had perhaps a trader made a mistake of a sales volume entered into the electronic trading system of the LME? This has led to talk about a “thick thumb” which had accidentally used the keyboard. But, as would be usual in such cases, there hasn’t been an immediate reversal and correction of the nickel price. With just short breaks, not enough to take a breath, the landslide continued. Another two momentous trading days then pushed the price of the alloy and battery metal down to even below the USD 16,000.00/mt level. Many were shaken for a second time, as there was initially no buying interest due to a lack of physical buyers on the LME. And which investor or speculator grabs at a falling knife before the market has bottomed out.

At this level, last seen in November/December 2020, the downwards movement then came to a standstill. Since then prices have been moving in a range between USD 16,000.00/mt and 16,300.00/mt. Media and analysts quickly found various, more or less plausible explanations for the occurrence: Elon Musk might have thought that nickel prices were too high and Tesla would therefore change to another type of battery, China’s Congress would consider stricter environmental legislation, which could put pressure on the domestic stainless steel production and therefore also nickel demand.

It was also reported that the Chinese nickel and stainless steel giant, Tsingshan Holding Group would like to supply nickel preliminary products on a large scale for battery nickel production in the future, which could alleviate the suspected medium term undersupply in the nickel market. Finally chart technicalities have to be mentioned. The rapid price decline must have certainly triggered many stop-loss orders, which, combined with electronic trading programmes based on following trends, intensified the downward spiral.

Old hands amongst the brokers at the LME do not, however, trust in such attempts at explanations very much. In their point of view, this totally unexpected Black Swan event is explained as follows. The collapse of the British-Australian Greensill Capital could be behind it, also since there is a close time connection. The sudden loss in the financing value chain which had been provided by Greensill could have led to one or two, or more, of Greensill’s clients having short-term liquidity requirements. These could, for example, be quickly and effectively covered by the sale of certain warehouse stocks or futures positions.

Whilst other finance and commodity markets are sufficiently big enough to accept substantial sales orders without creating distortions, the nickel market is a comparatively small segment. Here the price drops which were triggered must first be absorbed before a counter movement can begin. The fact that the LME nickel warehouse stocks, around the same time as the difficulties with Greensill became known, suddenly increased by about 12,000 tons, corresponding to a value of approximately 200 to 250 million US-dollars, supports the theory. Ultimately, the direction of nickel prices in the coming weeks and possibly more information and news will indicate which explanation can lay claim to the most truth.

It should, however, be noted that in direct reaction to the drop in nickel price, the availability of stainless steel scrap initially fell sharply. This is because large stocks had already been liquidated at attractive prices. Those who had perhaps been too greedy and had waited showed they did not have such a lucky hand and were completely caught out on the wrong foot by the development. They are now presumably waiting for a mentally acceptable price level to be reached before forcing themselves to take a decision to sell.

Shortage of vaccines comes under criticism
The Federal Minister of Health and the President of the EU Commission have been put under considerable pressure recently by both media and the public because of the sluggish German and European vaccine supply for Covid-19. Nevertheless there has to be a certain amount of understanding in the current situation. Bureaucratic and clumsy handling and organisation can, of course, be criticised.

Corona vaccine is a scarce commodity these days and the supply, like stainless steel scrap, cannot be just easily and quickly increased at will. It is hardly possible to increase the existing global capacities for production of the vaccines in just a few weeks and the pandemic is a global challenge. Vaccines cannot simply be moved from one continent to another when it is basically needed everywhere. That in the end, the USA and Great Britain or the vaccination testing laboratory Israel were the quickest was mainly due to economic reasons. Whoever pays more and/or risks more, finishes with more.

In the present structure, a win-win situation which politicians prefer was just unable to be reached. The supply is fixed in the short-term and just not flexible. In this respect it is, therefore, a zero sum game. At the moment, more vaccines for the EU and Germany would mean less for the USA, Great Britain and other countries around the world. And a glance at some emerging countries shows that they have only just received their first vaccines. And who were the first to be vaccinated? Of course, generals and top politicians, who else? Therefore the vaccine industry, supported by governments, is working tirelessly to create new vaccine production sites. More cannot be done.

So it is already foreseeable that in the not too distant future, there could be more of a problem in the short-term administration of vaccines, than with the availability. This is all not very nice, but just how it is. A permanent set-up of necessary capacities to deal with a global pandemic will certainly be discussed politically later and perhaps even created. But with the considerable costs of maintenance in the background, these will probably, within a short space of time, be “dismantled” again, back to the border experiences of present, just like the intensive care beds and the inadequate amount of professional staffing in care and nursing homes were.

Also the risk of mutations increases with vaccinations and infections. In this respect it has been controversially discussed whether a broad vaccination programme when there is not enough vaccine for everyone at the same time, is actually the best way forward. This versatile virus would of course like to carry on multiplying and not be defeated. And every mutation is like a lucky bag. Since Darwin, it is known that in nature the fittest mutation prevails in the end. Now it could be said that unfortunately mankind does not mutate as quickly as the virus, but as the evolution in this pandemic has also shown, at least some people do learn and can certainly compete with the virus on an equal footing or even a little better. It is, therefore, still better to be a person with all advantages and disadvantages rather than a foul virus.

Nornickel pay record fine
Last year the Russian mining company Nornickel caused an extremely terrible environmental catastrophe in the Russian part of the Arctic. 21,000 tons of diesel poured out of a rusty tank into the Ambarnaja river, which feeds a lake from which another river flows. The latter in turn flows into the ecologically sensitive Arctic Ocean. The dimensions of this diesel catastrophe were so great that the Kremlin head, Vladimir Putin, had to declare a state of emergency. In a video conference President Putin then even maliciously mocked the main owner, Nornickel President Vladimir Potanin who is also the richest man in Russia, in front of government representatives and ecologists.

A few weeks ago, Nornickel was sentenced by a Russian court and ordered to pay compensation in the amount of 2 billion dollars. This has, in the meantime, been paid, since the metal giant had no intention of appealing against the ruling. In 2019, Nornickel generated a turnover of 13.6 billion dollars and managed a net profit of 6 billion dollars. Therefore, the payment for the commodity giant should have been manageable.

China is fighting pollution in heavy industry
The Chinese government is also fighting massive pollution in its own country. A few days ago, it emerged that some Chinese steel producers are undermining anti-pollution efforts with faked production figures. During unannounced inspections, officials of the Ministry for Ecology and Environment discovered inconsistencies in four steel works in the city of Tangshan. Production records were falsified or partially deleted. The plants even warned one another about the unannounced visits.

As soon as pollution exceeds a certain level in a region, the biggest emitters in the area, such as heavy industry companies, are ordered to reduce production. The news portal Fastmarkets, in context to this, refers to a market expert who explains that, of course, a high production load makes production costs look better.

China has, for some time, been battling against massive overproduction in the domestic market and is even forcing a market consolidation and the closure of old steelworks. However, the continuing increase in iron ore imports is an indicator that these measures have not yet borne fruit.

The LME discussion paper meets resistance
Due to the Covid-19 pandemic, the traditional red leather trading ring of the LME has remained closed since March of last year. Since then the LME benchmark price for base metals, important for the industry, has been determined electronically and not, as in the past, through face to face trading activity in the ring within certain timeframes.

In January 2021 the LME published a discussion paper, in which, among other things, the suggestion was made to completely abolish the iconic trading ring, justifying this with better liquidity and transparency in the new price determination process. In the meantime, a broad front of brokers and industrialists has formed which would like to discourage the LME from taking this step.

Another suggestion from the LME is to consider changing to a different method of clearing accounting. This has also been criticised by many sides. At present, clearing is based on Discounted Contingent Variation Margin (DCVM), which only balances profits from futures on the settlement date. This method, together with the structure of forwards, is the main reason why the LME is often referred to as a forward market and not a futures market. In the discussion paper, the LME considers changing to the Realised Variation Margin (RVM) method, whereby gains would be settled on a daily basis and payments between parties would be made at short notice. This model is used by most futures markets around the world.

Although the RVM model would be technically possible for all parties, the timing of special settlement dates in conjunction with the futures structure ensures the attractiveness for brokers and industrial market participants and distinguishes the LME from other markets. The RVM method allows for futures gains to be paid out earlier, whereas the DCVM method allows for profits of one participant to be compensated with the losses of another. The constant payment of profits would lead to a liquidity drain from the brokers. In view of the decreasing number of brokers anyway, the remaining ones would be put under more pressure. Without doubt, the RVM method would be the preference of speculators, since profits could be realised more simply.

Since a large part of LME volume is still traded by industrial companies, exchange prices have a realistic link to physical prices, and are, therefore, especially suitable as a hedging instrument for industry. Should speculators one day gain the upper hand, then a question mark would have to put on whether the prices are still representative and useful as a hedging instrument. Then speculators would, at the latest, be alone among themselves. Therefore, the LME has to decide whether it wants to remain attractive for the real economy, or whether it wants to attract casino capitalism.

ISSF presents production statistics for the year 2020
On the 15th March 2021, the International Stainless Steel Forum (ISSF) presented the figures for stainless steel smelting production for the full year of 2020. While global decline after nine months was minus 7.8%, it could improve in a strong 4th quarter with 14.125 million tons to “only” a minus of 2.5%. In all regions, a strong final quarter was able to provide some relief. China was even able to increase its stainless steel production by 2.5% to now over 30 million tons, despite the pandemic challenges of 2020. This is equivalent to a market share of almost 60% with a total global production of 50.892 million tons.

But also the category ‘other’, which includes the very heterogeneous and artificial cluster of Brazil, Russia, South Africa and Indonesia, could increase by 6%, from 5.525 million tons in 2019, to 5.857 million tons in 2020. One does not have to be a prophet to assume that Indonesia, in this group, must have had the biggest share of the increase. Finally stainless steel smelting production in Europe is around minus 7.1%, having fallen to 6.323 million tons, but still a clear improvement after a decrease of minus 13.1% for the first three quarters. By all accounts and also made apparent by good scrap demand, prospects for the 1st quarter 2021 are not bad: stainless steel production should stay at an appreciable level.

European ferrochrome benchmark price increased to USD 1.56/lb
Shortly before the editorial deadline, it was announced that the European ferrochrome benchmark price has been increased for the 2nd quarter 2021 to USD 1.56lb. In the 1st quarter of 2021 it had still been USD 1.175/lb. This sharp increase follows a period of unusual stability. The quarters two to four last year had had an identical price of USD 1.14/lb, and the increase for the 1st quarter was only moderate at just 3.5 US cents. The reason for the increase now is a robust demand for raw materials, especially from the stainless steel producers of China. A similar trend could already be seen in international prices for spot amounts during the previous quarter.