(Bloomberg) -- A Chinese tycoon who built a massive short position in nickel futures is facing billions of dollars in mark-to-market losses after this week’s unprecedented price spike, according to people familiar with the matter.
Xiang Guangda -- who controls the world’s largest nickel producer, Tsingshan Holding Group Co., and is known as “Big Shot” in Chinese commodity circles -- has closed out part of his company’s short position and is considering whether to exit the wager altogether, the people said. Nickel rocketed to a record high above $100,000 a ton on Tuesday, driven in part by Tsingshan and its brokers’ activity, before trading was suspended.
While the exact scale of Xiang’s losses is unclear, Tsingshan’s short position on the LME is in the region of 100,000 tons of nickel, people familiar with the matter said. It could be even larger than that when positions taken through intermediaries are taken into account, people separately said. That means it would have suffered well over $2 billion of daily losses at the most extreme point of nickel’s surge on Monday.
That would come on top of any losses incurred by the tycoon since he began building the short position late last year through closely held Tsingshan.
Xiang told Chinese news outlet Yicai that Tsingshan did not have any problems with its nickel trading. “We’ve received a lot of phone calls today. Tsingshan is an excellent Chinese enterprise, and our positions and operations don’t have any problems.”
The London Metal Exchange suspended trading in nickel on Tuesday morning after one of the most dramatic price spikes in commodity market history.
Prices had been ratcheting higher for weeks, amid fears of disruptions to supplies from Russia, the largest exporter of refined nickel.
The tightness in the market had been exacerbated by the presence of an unidentified trader who, according to exchange data, controlled somewhere between 50% and 80% of nickel warehouse warrants monitored by the LME as of last month.
Trading and mining giant Glencore Plc was the dominant holder of nickel in recent months, according to people familiar with the matter. A Glencore spokesman declined to comment.
But this week the rally became a melt-up, with prices surging as much as 250% in little more than 24 hours, to an all-time high of $101,365 a ton.
The superspike was driven by holders of short positions, including Tsingshan and its brokers, rushing to close them out. Tsingshan has been struggling to pay margin calls to its brokers, according to people familiar with the situation. It’s been under growing pressure to meet the payments in recent days, the people said.
Traders must deposit cash, known as “margin,” with their brokers on a regular basis to cover potential losses on their positions. Brokers in turn must hold margin at the clearinghouse, LME Clear. If the market moves against those positions, they receive a “margin call” requesting further funds -- and if they fail to pay, they can be forced to close their position.
On Monday, one of Tsingshan’s brokers -- a unit of a state-owned Chinese bank -- failed to pay hundreds of millions of dollars in margin calls on its nickel positions. The LME did not put it into default, instead giving it more time to pay. Those payments have now been made, a person familiar with the matter said on Tuesday.
The LME said Tuesday that trades that took place in Asian hours before the suspension -- when prices rose from around $50,000 to above $100,000 a ton -- would be cancelled. Even at Monday’s closing price of $48,063, however, Tsingshan’s mark-to-market losses would number in the billions of dollars.
Battery Nickel
Investor enthusiasm for nickel is high amid expectations of strong demand growth for the metal in electric vehicles. This week’s spike in prices has played out principally on the LME, and many traders expect the price to return to more normal levels once the margin call chaos has been resolved.
Tsingshan, among other Chinese companies, is ramping up a wave of new battery-grade nickel capacity in Indonesia. Xiang began building the short position in part because he wanted to hedge rising output, but also because he believed the rally in nickel prices would fade this year.
Still, this week’s short squeeze is nonetheless likely to push costs higher for battery companies and stainless steel makers, eventually feeding through into the price of everyday goods.
As such, if Tsingshan can weather the losses on its LME positions, the higher prices could yet benefit its core business of producing nickel and stainless steel.
©2022 Bloomberg L.P.
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