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March 9, 2022

Nickel prices leap to a record over global supply fears and short sales

The London Metal Exchange (LME) suspended nickel trading on Tuesday, after the price of the base metal skyrocketed to a record amid escalating uncertainty around major supplier Russia, and after an intense short squeeze.

Nickel rose to a record US$101,365 per tonne, more than doubling in a matter of hours. The previous all-time high was US$51,800 per tonne reached in 2007, at the tail end of a near-decade long economic boom.

Bart Melek, head of commodity strategy at TD Securities Inc., wrote in a note to clients that the “epic” rally on the LME was ignited by fears that global supplies will tighten, but then took on “a life of its own,” as traders failed to make margin calls.

When a nickel futures contract is sold short, traders borrow the securities from a brokerage, and then immediately sell in the hope the price will fall. If the trade works out, the investor buys back at the lower price, returns the security to the original investor, and books a profit. In this case, the opposite happened, and at warp speed. The nickel price jammed dramatically higher in a matter of hours, leaving shorts with massive paper losses. As traders moved to cover their positions, their purchases put even more intense upward pressure on nickel.

“How much supply comes from Russia, how messed up it is, how people hedge themselves more than they used to,” said Bill Harris, portfolio manager with Toronto-based Avenue Investment Management. “It’s just stunning what can happen.”

The LME, one of a handful of key global venues for metals trading, said it is planning to reopen the nickel trading market in an orderly fashion after cancelling Tuesday’s trades. But the timing is uncertain, and market watchers are bracing for more volatility.

“Big earthquakes create big aftershocks,” said Mark Selby, chief executive officer of Canada Nickel Co. Inc. “I think you’re going to see substantial, US$10,000-a-tonne a day moves in the metal price over the next couple of months.”

The nickel and wider commodity markets have experienced intense market dislocation in the past and recovered. In 1980, the Hunt brothers of Dallas famously manipulated the silver market, and were instrumental in the price of the precious metal rocketing five-fold in a few months. Later that decade, the LME shut down trading in tin for about four years after the international tin cartel collapsed. A retail buying binge driven by social media caused wild swings in the prices of uranium and silver last year.

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The disruption in the nickel market follows volatility in other commodities since Russia invaded Ukraine. Crude oil, potash and wheat have exploded in price because of Russia’s importance as a supplier. Gold, historically an asset of last resort during times of great uncertainty, is also trading near an all-time high.

Nickel is one of the workhorse metals of the global economy. A key input in the manufacture of stainless steel, it is also increasingly used in electric car batteries, and alongside lithium and cobalt, pitched as part of a trifecta of metals used in the transition to cleaner energy.

After Indonesia and the Philippines, Russia is the world’s third-largest nickel producer. Last year, it produced 250,000 tonnes, or close to 13 per cent of global output.

Canada is the sixth biggest global player, but over the past few decades, its influence has waned. Canada’s overall production has fallen more than 35 per cent since the mid-2000s, in large part owing to mine depletion. None of the publicly traded Canadian-owned nickel giants are left. The biggest producers were sold in the 2000s to foreign companies, which was controversial even at the time. Brazil’s Vale Ltd. bought Inco Ltd., the operator of both major mines in Sudbury and Voisey’s Bay in Labrador. Xstrata PLC, now Glencore PLC, bought Falconbridge Inc., the operator of mines in Sudbury, as well as Raglan in Quebec. Canadian Royalties Inc. sold the Nunavik nickel project in northern Quebec to Chinese state-owned enterprise Jilin Jien Nickel Industry Co. Ltd.

Mr. Selby, a former Inco executive, laments the sale of these assets, saying “there’s no way” the Canadian government would allow that now, especially given the importance of nickel to the country’s economic security.

He pointed to the recent furor after the federal government allowed the sale of Canadian lithium development company Neo Lithium Corp. to a Chinese state-controlled company without a formal national security review as evidence that the zeitgeist has changed. The sale of Neo Lithium incited fierce debate over how far Canada should go to protect its critical minerals industries, and resulted in parliamentary hearings that put the federal industry minister on the defensive.

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