The Clap
Nickel is a metal used for all kinds of stainless steel products & electric vehicle batteries. On March 8, 2022, Nickel surged over 250% on the London Metals Exchange (LME), reaching more than $100,000/tonne & causing the LME to suspend trading on it.
For reference
For the majority of the last ten years, Nickel traded between $10,000/ton & $20,000/ton.
Blame Russia?
Russia is the third-largest producer of nickel in the world & its largest exporter. While no sanctions targeted Russia’s Nickel exports, it’s the buyers who are looking for sources other than Russia.
The big shorter
Owner of the world’s biggest Nickel manufacturer Xiang Guangda, holds a significant short position on Nickel, meaning that it’s betting Nickel prices would fall. Xiang was then asked to put up more money to cover the trade, also known as a margin call.
Why bet against a commodity you produce?
It’s a pretty common move by producers in the commodities market. Producers take short positions to hedge against possible losses on the physical commodities in their inventory. If prices fall, business revenue gets hit, but short positions are there to cover some/all of the losses. The catch is that traders must be able to meet their margin calls, which isn’t the case with this Nickel saga.
Claps Class
Hedging is an investment position intended to offset potential losses that may be incurred elsewhere.
What’s next?
Nickel is set to resume trading on the LME tomorrow, Wednesday, March 16, 2022. As for Xiang, he’s maintaining his short position which has incurred billions of dollars in losses. But remember, his company also benefited from the surge in Nickel prices, being a Nickel manufacturer after all.
