Nickel/LME: chaos from margin calls may recur in other asset classes

Financial warfare creates collateral damage — and damage to collateral. Tit-for-tat sanctions could disrupt supplies of nickel from Russia, the world’s third-largest producer. Prices for the metal, a vital ingredient in batteries and steel, more than doubled to over $100,000 per tonne on Tuesday. Chinese banks were scrambling to close bearish bets by clients.

Their soaring exposure had triggered margin calls for extra collateral. Expect this pattern to repeat. Many Russian oligarchs may be equally exposed to margin calls on personal loans secured against share collateral that has collapsed in value.

The difference between nickel and Russian stocks is that the metal is traded transparently via the London Metal Exchange. Prices were already at a decade high before Russia’s invasion of Ukraine. That lured in Chinese short sellers. But their big bets backfired amid the threat of sanctions on Russia’s Norilsk Nickel, the world’s largest single producer.

Reportedly, tycoon Xiang “Big Shot” Guangda owned the speculative short positions. He controls Tsingshan Group, a big Chinese nickel producer. As his bets soured, the LME, a subsidiary of Chinese exchanges group HKEX, stepped in to cancel trades, stop trading and restore market order.

Xiang is not the only one getting burnt by commodity volatility. Citigroup has reversed out of bearish bets on oil following steep losses. US coal miner Peabody Energy has posted collateral of $534mn to cover margin requirements.

Attention is now focused sharply on the style of leveraged commodity trading pioneered by Glencore founder Marc Rich. Deals typically involve buying physical commodities hedged with short positions using derivatives. These should balance out once physical delivery is received. That is tough for Tsingshan because its nickel is of lower quality.

Wars disprove our assumptions about what constitutes normal human behaviour, or normal markets. The LME has already been forced to take “unprecedented actions” to prevent bankruptcies at exposed commodity brokers. Daily price limits are a logical step for the exchange. Margin calls may not be defanged so easily in other asset classes.