This follows a tumultuous period for the nickel contract, which began when unprecedented volatility led to its suspension in March 2022.
“I in no way want to understate the significance of what happened in nickel last year or [its] continuing effects,” CEO Matthew Chamberlain said in a recent interview with Fastmarkets.
“But our number one priority has been to restore stability and confidence to the Class 1 contract,” he added.
According to Chamberlain, two key things were done before the LME resumed trading in the nickel contract after its temporary halt in March 2022: the imposition of daily price limits; and new position reporting measures for the over-the-counter (OTC) market.
Subsequent recommendations made in an independent report produced by the Oliver Whyman management consultancy led the exchange to make the OTC reporting permanent and to adopt a full-calibration approach for price limits.
“I’m not trying to understate the impact these and other measures have had, but I don’t talk to people now who say that they have a problem with the use of the LME for Class 1. But there’s still a lot more to do,” Chamberlain said.
An additional step by the LME has been to adopt a fast-track listing approach and a fee waiver for new LME nickel brands, which has in turn led to a number of new listings by Chinese producers.
“That has just proved so impactful,” Chamberlain told Fastmarkets. “There’s more supply coming into the market and we’ve not only got brand listings, but we’re now seeing the material actually being warranted. But, more importantly, it’s about the message that the new brands send to the market: that it isn’t dangerously under-supplied and could blow up any moment due to a lack of stock
“From a Class 1 perspective, I actually feel as good as I could right now, in terms of where we stand. That’s not to say that people might be looking at alternative pricing mechanisms, [that] they may have issues with the way the LME works, or they may not think there’s enough liquidity so they’re doing more OTC, which actually is a common theme that we hear,” he said.
“However, in general, I feel much more confident than I have for the past 18 months in saying that the LME is really fully there for the Class 1 market – to be what it needs to be. I’m not saying everyone’s going to agree with that, but I feel I can credibly defend our position now,” he added.
In recent weeks, Chinese nickel raw material buyers have been shifting back to a pricing mechanism based on the LME nickel contract, market participants said.
Margin calls
There have also been calls on the LME to reduce the level of initial and concentration margins to allow market participants to increase the size of their positions relative to the cost.
This has been happening, but the cost is still considered prohibitive by some.
Data from the LME’s clearing house shows that in April 2022, the initial margin was $6,194 per tonne and in September it was $4,509 per tonne.
“One of the things you have to have as an exchange – and particularly as a clearing house – is a long memory, because in March 2022, people were not coming to us saying, ‘Why are your margin levels for nickel so high?’. People were instead saying, ‘Why weren’t you holding more margin?’,” Chamberlain said.
“Obviously, times change, but we have to look back to March 2022 and our overriding commitment [then] was about the stability of our market, not about growing volumes. That is why our margin levels are higher than when they were [before the] nickel incident – although they have absolutely come down since.
“I don’t pretend that the margins are low by any means, but there is a commitment to reducing them. We are being as commercial as possible, while acknowledging that, ultimately, we’re responsible for the stability of the market,” he added.
OTC market
The LME has for many years been asking its members for greater oversight of the OTC market, where trades take place directly between two parties without the supervision of the exchange.
Last year, a vast short position was built by several banks on behalf of Chinese nickel and stainless producer Tsingshan Holding Group, contributing to the wild swings seen in LME prices in March 2022.
Following the nickel saga last year, the LME has adopted measures to increase transparency in the OTC market, including the recent launch of an automated portal for weekly reporting, Chamberlain said.
“Obviously, the reporting is never going to be as comprehensive as if it had a regulatory mandate behind it. But I feel good that we have a much better view and, importantly, a view that, if you play back the events of last year, we would have had a much clearer view of the OTC nickel market situation,” he said.
At the same time, he said the LME has received complaints that the OTC booking fee is lower than the on-exchange booking fee.
“People trading on-exchange argue that they are not only adding liquidity and visibility to the LME, but are also being charged for the privilege, whereas someone trading on the OTC market is not being charged as much,” Chamberlain told Fastmarkets.
“So, of course, that’s something that we look at, and we need to see if we want to address that. But, given our set of rules, it’s going to be more through economic incentives, than necessarily [through] regulation,” he added.
In Hotter Commodities, special correspondent Andrea Hotter covers some of the biggest stories impacting the natural resources sector. Sign up today to receive Andrea’s content as it is published.
