LONDON- The war in Ukraine has engulfed the 145-year-old London Metal Exchange (LME), which sits at the epicenter of the global trade in industrial metals.
What Russia terms its “special operation” has broken the LME nickel contract and forced the exchange to impose emergency measures across the rest of its core base metal contracts.
This is a tale of two crises.
The first is the threat to supply from Russia, a major producer of aluminum, copper and, of course, nickel.
Even absent explicit sanctions, Russian metal exports must now navigate tightening financial, logistical and trading restrictions as ever more companies drop their Russian ties.
Industrial metals were already in bull mode. War in Ukraine has poured oil on simmering markets, particularly nickel, where the price explosion blew apart the huge short positions held by China’s Tsingshan Group.
Which then triggered the second crisis.
Nickel rose by 61 percent to $48,078 per ton on Monday, March 7, generating massive calls on cash to meet margin calls and threatening what the LME termed “a systemic risk to the market” with potential “multiple defaults” among LME brokers.
Nickel was suspended the following Tuesday and remains so at the time of writing.
Every other LME-traded metal has been caught up in the storm, the ripple effect determined by each market’s exposure to both Russian supply and LME margin shocks.
Metals trading last week was all about “margin and pain”, LME broker MarexSpectron said in a note to clients.
The LME’s core contracts are not cash-settled futures but forwards with positions financed by credit lines secured against collateral. Nickel’s blow-out required huge increases in margin collateral not just from Tsingshan but from every other short position holder.
This set off a domino effect as positions in other markets were liquidated to raise urgently needed funds.
As nickel went supernova on Tuesday before the LME pulled the plug at 0815 London time, so did both zinc and lead.
Zinc shot up to a record high of $4,896 per ton and lead to a 10-year high of $2,700 per ton in the early hours of trading.
By the end of the day both were pretty much back where they started, suggesting the spike was down to a sudden forced exit of short positions.
Aluminum moved in the opposite direction, three-month metal dropping from Monday’s high of $4,073.50 per ton to $3,498.00 at Tuesday’s close.
