Column: London Metal Exchange tries to move on from nickel crisis: Andy Home

Abaxx Technologies

16/10/2023 24:00

(Repeats Friday's column with no changes to text)
    By Andy Home
       LONDON, Oct 13 (Reuters) - The London Metal Exchange's
(LME) Monday seminar was packed out, the Tuesday black-tie
dinner was as glitzy as ever and the champagne and wine flowed
liberally in the many meetings and cocktail parties taking place
across London's West End.
    This year's LME Week, the annual gathering of the world's
metals industry, felt like a return to bygone days, the numbers
boosted by the welcome return of Chinese visitors after three
years of travel restrictions. 
    But last year's nickel crisis continues to cast a long
shadow over the 146-year-old exchange. 
    Judgment is pending on the lawsuits brought by U.S.-based
hedge fund Elliott Associates and market-maker Jane Street
Trading over the controversial cancellation of nickel trades. 
    The LME is still in recovery mode. The focus is on
strengthening its trading and clearing systems and polishing its
ESG credentials in an effort to regain trust with investors and
industrial players respectively. 
    Hong Kong Exchanges and Clearing  0388.HK , which bought the
LME in 2012, still views the LME as "front and centre in our
ambitions", chief executive Nicolas Aguzin reassured the Monday
audience. 
    But while the LME turns inwards to heal, it risks being
outflanked by rivals looking to get in on the green transition
metals boom. 
    
    VOLUMES RECOVER BUT NICKEL LAGS
    The LME can take comfort from a return to volume growth this
year. Trading activity rose by 5.2% year-on-year in the first
nine months of 2023 after sliding by 8.3% in 2022. 
    The strongest driver has been the lead contract. Volumes
have grown by 42% so far this year, the heavy metal attracting
lots of investor interest after its inclusion in the Bloomberg
Commodity Index from the start of 2023. 
    Scrap remains the star of the LME's ferrous suite,
underpinning a 52% increase in volumes across the exchange's
seven listed steel products. 
    Nickel, unsurprisingly, is lagging the broader recovery.
Average daily volumes picked up in the July-September quarter
but were down by 26% year-on-year over the first nine months of
2023. 
    Open interest has grown from 140,166 contracts at the end of
January to 184,571 at the end of September but is still some way
off participation levels prior to March last year. 
    LME stocks also remain low at 42,800 metric tons, which is
why the exchange is fast-tracking producer brand applications,
particularly those from China, where operators are bring on new
LME-deliverable nickel capacity. 
    Rebuilding the London nickel contract is clearly very much
work in progress.
    
    FIXING NICKEL
    Others, meanwhile, are looking to muscle into the LME's
nickel price discovery domain. 
    Global Commodities Holdings (GCH) continues to work on a
spot index for Class I refined nickel that would allow an
exchange partner to generate a futures market. 
    Singapore's Abaxx Commodities Exchange, owned by
Canadian-listed Abaxx Technologies Inc.  ABXX.NLB , is planning
to launch a nickel sulphate contract, the world's first for a
type of nickel used to make the lithium-ion rechargeable
batteries that power electric vehicles. 
    The Shanghai Futures Exchange (ShFE) is also looking at its
nickel offering, although its interests are closely aligned with
those of the LME. 
    Both trade high-purity Class I refined nickel, which
accounts for a diminishing part of the global market. The
mismatch played a part in last year's nickel debacle and has
created price disconnects with other forms of the metal. 
    The Shanghai market also took a big collateral hit from the
London turmoil, volumes on its nickel contract collapsing by 53%
last year relative to 2021. 
    The two exchanges "have opened a new chapter of close
cooperation and we intend to further deepen our collaboration in
2024," LME chief executive Matthew Chamberlain told the LME
dinner audience. 
    He offered no details, but nickel is almost certainly top of
the mutual assistance agenda. 
    
    CME BUILDS MOMENTUM
    No metals seminar is these days complete without a
discussion of the booming electric vehicle (EV) market. 
    Nickel is a core input for many EV batteries, which is why
there is so much to play for in terms of an efficient price
discovery forum. 
    But when it comes to other battery metals such as cobalt and
lithium, the game is already over. 
    The LME's cobalt contract hasn't traded since March and its
lithium contract hasn't traded at all. Those wanting some EV
metals action have turned to the CME  CME.O . 
    The U.S. exchange launched its cobalt contract in 2020 and
has seen activity mushroom over the last year. Volumes more than
doubled and open interest more than tripled in the first nine
months of 2023. 
    CME's lithium carbonate contract registered record monthly
volume in September and open interest has surged from just 429
contracts at the start of January to 7,532.
    Perhaps more disconcertingly for the LME, the CME's
aluminium contract is also going from strength to strength with
rising participation from both industry players and investors.
Volumes hit a fresh record in September and were up by 176% over
the January-September period. 
     
    DANCING ON THE SPOT
    Exchange trading volumes are not a zero-sum game. A liquid
CME aluminium contract opens up new arbitrage opportunities with
both London and Shanghai, in theory benefiting all three
exchanges. 
    However, it's clear that the LME is losing its previous grip
on global price discovery. 
    This in part reflects a world that has passed peak
globalisation and a metals chain that is rapidly becoming more
regionalised. 
    But in part it's also a problem of the exchange's own
making. The blow-out of the nickel contract and the resulting
near-death experience of both brokers and exchange have sapped
confidence in the historical market of last resort. 
    The exchange is still healing and may yet take more knocks
depending on the outcome of the legal action in London and the
ongoing investigations by British regulators. 
    This year's LME dinner marked a break with tradition. There
was no guest speaker and, perhaps more importantly for many
guests, no traditional bet on the length of the guest speech. 
    Rather, the metals men and women were regaled with some
dancing from Ireland's Riverdance ensemble. Irish dancing is
high energy and requires intricate foot-work but the dancer
remains vertically rooted to a single spot.
    It's an apt description of the LME right now.  
    
    The opinions expressed here are those of the author, a
columnist for Reuters.

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LME volumes start growing again after 2022 nickel crisis    https://tmsnrt.rs/3rRgT74
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 (Editing by Kirsten Donovan)
 ((andy.home@thomsonreuters.com, 44-207-542-4412 and on Twitter
https://twitter.com/AndyHomeMetals))