By Pratima Desai
LONDON (Reuters) – The London Metal Exchange faces a struggle to regain its dominant position in global nickel trading as volumes fall and participants flee an increasingly volatile market following the trading chaos earlier this year.
Nickel volumes collapsed in the world’s oldest and largest metal trading venue after the London Metal Exchange suspended its contract for a week and canceled all trading on March 8, when prices doubled within a few hours to a record high above $100,000 a ton.
LME data shows that many participants have abandoned the nickel market, a trend that many traders say appears to continue to cause lower trading volumes and more volatility as more people choose to negotiate prices directly.
Average daily volumes of nickel traded on the London Metal Exchange fell 50% last month to 203,856 tonnes compared to the same period last year. This follows declines of 28%, 35%, 25% and 42% in April, May, June and July, respectively.
“Volumes may fall because there is still a certain lack of confidence in the LME after the March disaster,” said Andrew Mitchell, an analyst at Wood Mackenzie. “LME nickel does not represent the bulk of the market.”
This year, nickel that can be delivered against the LME contract will reach just 650,000 tons, or about 21% of global production, compared with 50% in 2012, said Jim Lennon, analyst at Macquarie.
The exchange says it is working on potential improvements.
The exchange told Reuters in response to a request for comment: “LME is actively engaging with users of the nickel market to consider … potential nickel contract enhancements and additional measures to address the growing market in nickel and its variants.” “We look forward to sharing the plans in due course.”
ring of death volatility
Many traders believe that the LME nickel contract will never recover as low liquidity has created a vicious cycle of low volumes and extreme price volatility.
They say that trying to trade even 10-20 lots or 60-120 tons of nickel is difficult without changing the price, compared to 200-250 lots or 1200-1500 tons before March.
Fluctuations and increased supplies of Indonesian nickel ore (NPI) used to make stainless steel are spurring a shift away from the LME contract. NPI is a low grade alternative to pure nickel metal.
Mitchell said the NPI, which cannot be delivered against the LME contract, is expected to account for more than 50% of global supply this year at 3.1 million tonnes from 12% in 2010.
“There is an oversupply of nickel ore iron,” Lennon said. “NPI is priced at around $16,500.”
An LME nickel is priced at about $24,500 per ton.
The NPI is not traded on the Shanghai Futures Exchange either. ShFE offers a nickel metal necklace that is closely related to the standard LME nickel nodes.
“The LME contract is imperfect in the context of how the market is evolving. There are different pockets and the LME contract caters to only one of those pockets,” said Michael Widmer, analyst at Bank of America (NYSE: NYSE).
Nickel sulfate, which is used to make the cathode component of electric car batteries, is another product. Sulfates can be manufactured from nickel briquettes stored in LME registered warehouses.
But LME nickel stocks have been depleted and sulfate is now manufactured from matte nickel, a product that can be made from nickel ore iron (NPI), and another intermediate product known as a mixed hydroxide precipitate (MHP) produced in Indonesia.
CME Competitor Exchange Group (NASDAQ:) is looking into launching nickel sulfate nodes, according to sources. She declined to comment on how her plans are progressing.
Stainless steel plants, many of them in China, consume about two-thirds of the world’s nickel supply. Electric vehicle batteries are expected to take a larger share as sales increase due to the energy transition; About 30% by 2030 compared to 15% last year.