11th March 2022
Commodity markets have been on a wild ride in the last week or two, but nothing has grabbed attention like nickel. The London Metals Exchange (LME) suspended trading in the metal on Tuesday after the price blasted up by 250% over two days to briefly hit $100,000 per ton, and the Shanghai Futures Exchange (SHFE) followed suit the next day as it hit its daily increase limit for three days in a row. Why has this frenzy taken place? Well, the nickel market was tight on supply worries before the European security situation disintegrated, but with Russia producing a solid 17% of the world’s nickel, much of it in high-quality forms that suppliers in Indonesia and China struggle to match, the market lost its mind on fears that it would be cut off from much of its juice.
But look, you don’t need me to recap the dry details of nickel price movements for you: if you’re exposed (and I sincerely hope that none of my readers were short nickel at the start of this week), then you’ll already be following the price movements closely. If you need a sharp shock to really absorb what has happened in the nickel market, just take a look at this graph. But instead of all that, I’d like to focus on some of the personal and corporate drama, some might say the madness, that this nickel business has unveiled.
Did you go to high school with a guy who insisted on being called something like “Big Shot”, even though nobody would ever comply? I did, and I suspect there’s one in every school. Well, it turns out that if you’re a Chinese nickel tycoon, you can get people to call you “Big Shot” and, even better, make them keep a straight face while they do it. That’s the nickname of Xiang Guangda, owner of Tsingshan Holding Group Co., the world’s largest producer of nickel. Through Tsingshan, Guangda held a truly enormous quantity of short positions in nickel which, for the less financially-minded among you, meant that he was betting the nickel price was going to fall.
This might seem like a strange approach for someone who is in the business of selling nickel – surely he’d want the price to rise? But it’s not unusual for big miners to acquire short positions against the commodities they produce– it’s called hedging, and it helps insulate them from losses from their core business if prices do fall. Indeed, Guangda had reason to think that nickel prices might fall, since his own company unveiled an alternative and likely cheaper process for making battery-grade nickel at the end of last year, leading to a potential spike in production. But the degree to which Big Shot was “hedging” was out of all proportion. Indeed, it looks very much like it wasn’t so much a hedge as a serious, maximum-stakes bet that nickel prices would tumble. How big a bet, you might be asking? Well, in a piece that gives a nice mini-profile of the man behind the myth, Bloomberg reports that he could well have lost $2 billion on Monday alone, with perhaps $8 billion overall, and that still leaves him short about 150,000 tons of nickel.
More background for the non-trading-inclined: the reason that this is an immediate problem is that you can’t just sit on a short position indefinitely and wait for the price to eventually fall. When your investments (in this case, your bets that the price will drop) lose value, your broker has the nasty habit of sending you what is called a “margin call”, demanding that you deposit cash to make up for the dwindling value of your assets. This is a colossal problem if you’ve taken a short position against an asset whose value skyrockets, because you have to come up with a lot of cash very suddenly. Indeed, an unknown but certainly significant amount of the stratospheric rise in the nickel price was driven by investors who were short the metal and who suddenly had to buy nickel to cover their positions because they couldn’t meet margin calls.
As you can imagine, when you’re billions of dollars in that hole, liquidity becomes an issue very quickly. In fact, CCBI Global Markets, one of Tsingshan’s brokers, had already failed to pay hundreds of millions of dollars in margin calls on Monday, though the LME gave it more time and it scrabbled the cash together on Tuesday. But Tsingshan itself has had to reach out to creditors, including those encouraged to play nice by Chinese authorities, in order to meet its margin calls. Then, remarkably, Big Shot apparently told those same creditors and brokers that he liked his remaining short position how it was, thank you very much, and he did not wish to exit it because he still thinks the price will fall. Look, that’s not as mad as it may seem at first glance: Tsingshan’s production costs are reported to be as low as $10,000 a ton, so Guangda would reportedly short nickel when it was above $20,000 a ton, and it probably won’t get back down to that level for a while. But at the same time, this seems rather like the market equivalent of carelessly burning your hand on a hotplate and then insisting on the wisdom of keeping a hotplate on maximum power next to you at all times.
Look, Tsingshan is far from solely responsible for the chaos in the nickel price this year – indeed, there are other perhaps equally-large but more shadowy actors in the market who will be having their own effects, and the accumulation of relatively small trades does add up to a major trend when everyone tries to do the same thing at once. But by the same token, Tsingshan is enough of a Big Shot that it can (and has before) upset the market on its own. It’s a scary situation for those who actually need nickel to run their businesses, but the price of nickel will eventually settle down, and Big Shot truly will have left his mark on the world.
Around the Traps
Dreading summer? Can’t stand the heat? Or do you just love seeing a phenomenal gold deposit being advanced quickly and rigorously? Either way, have a look at the video below showing winter progress on Rupert Resources’s (TSXv:RUP, OTCQX:RUPRF) near-4 million ounce Ikkari discovery in Finland:
Another exciting video from a company exploring in Europe, with Prospech (ASX:PRS) providing an informative update on their very nice polymetallic Cejkov-Zemplin prospect in Slovakia, as well as their other projects in this promising mining jurisdiction!
We love hearing The Critical Investor’s thoughts here at Spotlight, since the opinions are always considered and well-reasoned. Here are some thoughts on Aztec’s (TSXv:AZT, OTCQB: AZZTF) drill results from the end of February, and more on Dolly Varden financial and drilling news. Check them out!
Mammoth Resources (TSXv:MTH) has some nice drill results from its Tenoriba gold-silver property in Mexico. President and CEO Thomas Atkins said: “We continue to intersect potentially economical gold-silver grades over lengthy, tens of metre intervals at generally shallow depths in significant step-out distances from prior drilling. In this case, in addition to the interval lengths, we hit some impressive grades.”
Mawson Gold (TSX:MAW, FRA:MXR, PINK:MWSNF) has some great results from their Sunday Creek gold project in the Victorian goldfields of Australia. They’ve drilled 5.6 m at 10.0 g/t AuEq including 1.2m at 39.4 g/t AuEq and extended the mineralisation laterally and at depth.
KORE Mining (TSXv:KORE, OTCQX:KOREF) has identified three new drill targets at its Imperial gold project in California. They’ve also expanded two existing targets to 1.5 and 2 km of mineralised length, and completed some good mapping and sampling work.
Kodiak Copper (TSXv:KDK, OTCQB:KDKCF, FRA:5DD1) is another junior with nice drilling news, after they intersected long intervals of good copper, gold and silver grades at their flagship MPD project in British Columbia.
Even more fabulous drilling results, this time historical ones from Excellon Resources (TSX:EXN, NYSE:EXN, FRA:E4X2), who are doing intensive work to synthesise historical results at their Kilgore gold project in Idaho. They’ve found amazing numbers like 19.75 g/t Au over 4.27m, and are planning more drilling at the site.
That’s all from me today, I hope you all coast comfortably into the weekend! All the best,
- Jane Lockwood