Metal markets become the latest casualty of war

A Chinese metals tycoon known as “Big Shot” is understood to have lost billions of dollars in mark-to-market losses after the price of nickel soared by more than 170% over the last few days in some of the hairiest financial trading seen for decades.  

According to Bloomberg, Xiang Guangda – who controls the world’s biggest nickel producer, Tsingshan Holding Group Co – has been building up short positions in nickel derivatives over the last few weeks. The tycoon was attempting to hedge against the risk of falling prices but appears to have shot himself in the foot as uncertainty over supply issues and increased demand for the commodity has driven prices to record levels. 

Guangda has now closed out part of his company’s short position, and may be deciding to pull out of the derivatives contract completely. His short position on the London Metals Exchange is said to be for around 100,000 tons of nickel which – at the recent rocketing prices – could have led to daily losses of around $2bn following the recent price rises. Maybe more.

As Bloomberg’s reporter, Simon Casey, put it: “The short squeeze on nickel on the LME is just completely out there. The three-month price has doubled in less than 48 hours. I’ve been watching this market for 20 years and seen nothing remotely like this”. 

Nickel is one of the essential components for making the batteries for electric vehicles which is why China’s Guangda has been attempting to buy the metal as he is building up new battery-grade nickel capacity in Indonesia. 

Morgan Stanley estimates the latest price rise could add $1,000 to the cost of an electric vehicle – another of the many unintended consequences that the transition from fossil fuels to renewables or “greener” vehicles has thrown up during this crisis.  

Following the doubling of prices in just a few hours, the London Metal Exchange, which is now owned by HKEX, Hong Kong’s stock exchange group, has now cancelled all nickel trades that took place today and to defer delivery of all physically settled Nickel Contracts due for delivery tomorrow. 

LME members were told: “The current events are unprecedented”, and that the exchange is closely tracking the impact of the Russia-Ukraine situation on the metals market.

Nickel was not the only commodity to take flight: prices for gold, fertiliser, wheat – Russia and Ukraine are among the world’s biggest wheat growers – aluminium and a host of other essential raw materials are all being pushed higher by the uncertainty of supply. Energy and food prices are now climbing at the fastest rate for 50 years, fuelling fears of recession across the Western world as living costs soar and wages stagnate. 

But the big question now is what happens to the oil price if the US goes ahead this afternoon with its ban on Russian oil to keep up the onslaught on the invader’s economy.

The White House has warned that President Biden is due to announce further actions to continue to hold Russia accountable for its unprovoked and unjustified war on Ukraine. While the US depends on Russian oil for less than 10% of its imports, any ban by Biden will have an impact on oil prices because it will push up demand from other energy sources such as the OPEC countries. 

But Russia is ready for such a ban, having earlier today warned that if the US goes ahead then it will play tit-for-tat and stop gas supplies via the Nord Stream 1 going to Europe, which depends on Russia for a huge chunk of its energy. Indeed, Russia’s Deputy Prime Minister Alexander Novak said in an interview today that a “rejection of Russian oil would lead to catastrophic consequences for the global market”, prompting prices to more than double to $300 a barrel. 

So far, Germany and the Netherlands – which depend the most heavily on Russian oil and gas – have rejected the plan. The UK is less dependent – about 4% comes from Russia – but consumers would still be hit because gas prices from elsewhere would shoot up as demand from Europe increases. 

Germany’s energy minister, Robert Habeck, has already admitted that a ban on Russian energy could lead to popular unrest and would resist such a move. Even emergency measures to increase energy by switching from gas to boosting output from the country’s coal stations, would not be able to make up for the shortfall. 

Novak added: “We have every right to take a matching decision and impose an embargo on gas pumping through the [existing] Nord Stream 1 gas pipeline.” 

“It will take years, and it will still be much more expensive for European consumers. Ultimately, they will be hurt the worst by this outcome.”

Alternatively, you could say there are no winners in this new battleground for energy: it’s one of mutually assured destruction.