LME to Reopen Nickel Market March 16 After Xiang Short Squeeze

(Bloomberg) -- Nickel trading will resume on the London Metal Exchange on Wednesday, over a week after being suspended amid a historic short squeeze, after the tycoon at the center of the crisis reached a deal with his banks.

Xiang Guangda, whose large short position roiled the market last week, has secured a standstill agreement to avoid further margin calls, reducing the risk that the squeeze is repeated when the market reopens. In a notice to members on Monday evening, the LME said that bank support for Xiang’s Tsingshan Group Holding Co. “could suggest that the potential for further disorderly conditions may be mitigated.”

The restart of trading -- scheduled for 8 a.m. London time on March 16 -- will cap one of the most dramatic weeks in metals-market history that has plunged the entire industry into chaos, briefly brought a handful of brokerages to the brink of failure, and raised existential questions about the future and role of the LME itself.

The exchange on Monday outlined new curbs on trading to prevent wild swings in the future, including daily price limits across metals. It’s also looking into the trading activity and market conditions in nickel during last week’s chaos, when prices spiked by an unprecedented 250% in little more than 24 hours after Tsingshan struggled to pay margin calls on its large nickel short position.

After halting trading at the time, the LME also took the dramatic step of canceling about $3.9 billion of transactions that had taken place when prices moved from $50,000 to more than $100,000 a ton. 

In a statement on Monday, Tsingshan said that while the standstill agreement was in place, its banks, which include JPMorgan Chase & Co. and Standard Chartered Plc, “agree not to close out positions against Tsingshan or make further margin calls.”

The company is also negotiating a loan facility with the same group of banks to backstop its short position, and it said that talks on the funding would continue during the standstill period. 

Still, while Tsingshan has received the support of its banks, it has not exited its short position of more than 150,000 tons of nickel. The company said it would reduce its short position in a “fair and orderly manner as abnormal market conditions subside,” according to the statement.

It’s unclear whether that will be possible without once again roiling the market. Nickel prices in Shanghai have dropped sharply in the past week while the LME market has been closed, opening the possibility that traders could seek to export metal from China to LME warehouses, but that process could take weeks.

The LME last week attempted a process to try to close out short positions by matching market participants with long and short positions before the market reopened, but Xiang, known as “Big Shot” in Chinese commodity circles, showed little interest in taking up the proposal. He told the banks and brokers last week that he would like to keep his short position, Bloomberg reported at the time.

In an effort to avoid the sharp price swings that triggered vast margin calls last week, the LME will impose limits on the daily price move in nickel, as well as the other metals that trade on the exchange. From Tuesday, all metals other than nickel will be subject to a 15% limit in either direction. When it reopens on Wednesday, nickel will be subject to a limit of at least 5% in either direction, with the final figure to be determined. 

The LME is also stepping up its oversight of the nickel market. It said it would require all brokers to disclose all their clients’ positions in nickel that were larger than 600 tons, and might ask them for the rationale for their positions.

It said it was reviewing trading activity in nickel last week, and may decide to open a formal investigation.

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