Interesting morning. I feel boolish.
EveryTHING going gold except gold, relatively-speaking. A lot of money trying to squeeze through a very small door, to get from regular nothings to commodities anyTHING
(1) In the meantime, from Bloomberg upon waking up second time and at desk, to tally the trades done when woke up last, and the first item seems to note that should we gamble, and we do, best to know the boss of the casino, and in the case of nickel, China Construction Bank, caught in margin trap, knows HKExchange, parent of London Metals Exchange, and all coincidentally should one believe in such, arguably reports to the CCP China China China and yet not, just doing an admirable job of exchange management ala Hunt Bros, just swap nickel for silver
In the stock market, short sellers are often people who are betting against the price of a stock. They hope the stock will go down. If it goes up, they are wrong, and they lose money. If it goes up a lot, they will get margin calls; they will have to put up more money with their brokers to collateralize their risk. If it goes up a whole lot, they will have to cut their losses by buying back the stock, which will cause the stock to go up more, which will lead more short sellers to capitulate and buy back stock, etc. This is often called a “short squeeze.”[1] When it happens, people who bet against the stock — short sellers — are sad and lose money, and people who bet on the stock — long owners — are happy and make money.
In commodities markets, short sellers are often people who produce the commodity. If you are an oil company, your future income will depend on the future price of oil. In order to make sensible budgeting decisions about how much to spend on drilling oil, you might want to lock in that future price. So you might sell oil futures today to guarantee you a price in a few months. Or you might not; you might be bullish on oil and want full unhedged exposure. Or you might hedge part of your production; if you plan to produce 1 million barrels you might only sell 500,000 barrels of futures. Or, since you are trading oil futures anyway and have some expertise in oil markets, you might end up net short, selling more oil than you plan to produce as a bet that prices will go down. But most likely you are in the oil business because you are hoping to make money drilling oil, and you are in some broad economic sense “long oil.” (You might hedge 50% or 100% or 150% of this year’s production, but you won’t hedge 100% of all of your future production.) If oil prices go down you will be sad; you will make money on your futures contracts, but that will only partly mitigate your sadness.
Conversely, if oil prices go up, you will be happy, because you produce oil and your oil is worth more. But you will also have a mark-to-market loss on the futures you sold to partially hedge your oil price risk.
Or that is the general idea. There is an important difference in the cash flows of these things, though. If you are an oil company and the price of oil goes up, you will expect to make a bit more money each day that you sell oil. This money will not all come in at once: If you sell 10,000 barrels of oil a day and oil prices go up by $10 a barrel today, then you can expect to make an extra $36.5 million this year, but you’ll only get $100,000 of it today. The expected value of your future cash flows has gone up, and there are ways to turn that into money,[2] but it’s hard to do it fast.
On the other hand if you sold 3.65 million barrels of oil futures and oil prices go up by $10 a barrel today, you will get a call from your broker asking for $36.5 million of margin today. Futures are mark-to-market financial products, and when the futures price goes up, the short side of the futures contract has to put up money today.[3] The result is that when prices rise, your business outlook gets better, but you also need a lot of cash now. The bad possibility is that you might run out of cash now and be unable to enjoy all that future business.
Russia’s invasion of Ukraine, and subsequent sanctions and threats of future sanctions, has been bad for expected nickel supplies, which means that nickel prices have gone up a lot, which is in expectation very good for nickel producers, except when it is very bad for them right now:
Traders, miners and processors often take short positions on the exchange as a hedge for their physical stocks of metal. In theory, any price moves in the physical stocks and the exchange position should cancel each other out. But when prices rise sharply, anyone holding a short position on the exchange needs to find ever-greater sums of collateral to pay margin calls. Traders and brokers must deposit cash and securities, known as “margin,” on a regular basis to cover potential losses on their positions. If the market moves against those positions, they receive a “margin call” requesting further funds -- and if they fail to pay, they can be forced to close their position. Chinese entrepreneur Xiang Guangda -- known as “Big Shot” -- has for months held a large short position on the LME through his company, Tsingshan Holding Group Co., the world’s largest nickel and stainless steel producer, according to people familiar with the matter. In recent days, Tsingshan has been under growing pressure from its brokers to meet margin calls on that position -- a market dynamic which has helped to drive prices ever higher, the people said.
There is a sense in which this is all a bit unnatural. Yes, nickel prices should go up for geopolitical reasons, but arguably they should not go up that much; arguably the extent of these moves is driven by technical factors (margin calls on short sellers who are “really” long) that, in some sense, shouldn’t count. I mean. You could think that. You don’t have to; you could instead think “no, market structure is part of the real world, and if prices go up because of a short squeeze then prices go up, that’s life.” But some people certainly think that these price moves shouldn’t count, either because they are generically unnatural and unfair, or more specifically because they might blow up some traders and destabilize the market.
One way to reduce this sort of pressure is to suspend some of the margin calls, which happened:
A unit of China Construction Bank Corp. was given additional time by the London Metal Exchange to pay hundreds of millions of dollars of margin calls it missed Monday amid an unprecedented spike in nickel prices, according to people familiar with the matter. The reprieve from the LME means that the unit, called CCBI Global Markets, is not formally in default, the people said, asking not to be identified as the matter isn’t public.
Another, more drastic way to reduce this sort of pressure is to suspend nickel trading, which also happened:
The London Metal Exchange suspended trading in its nickel market after an unprecedented price spike left brokers struggling to pay margin calls against unprofitable short positions, in a massive squeeze that has embroiled the largest nickel producer as well as a major Chinese bank. Nickel, used in stainless steel and electric-vehicle batteries, surged as much as 250% in two days to trade briefly above $100,000 a ton early Tuesday. The frenzied move -- the largest-ever on the LME -- came as investors and industrial users who had sold the metal scrambled to buy the contracts back after prices initially rallied on concerns about supplies from Russia.
A third, even more drastic way to reduce this sort of pressure is to retroactively suspend nickel trading, by canceling trades that already happened. That happened too; from the LME today:
The LME have been monitoring the impact on the LME market of the situation in Russia and the Ukraine, as well as the recent low-stock environment observed in various LME base metals. With immediate effect, and following the suspension of the LME Nickel market announced in Notice 22/052, the LME (acting where required through the Special Committee) has determined that it is appropriate in the circumstances to take the following actions in respect of physically settled Nickel Contracts: (i) cancel all trades executed on or after 00:00 UK time on 8 March 2022 in the inter-office market and on LMEselect until further notice (Affected Contracts); and (ii) defer delivery of all physically settled Nickel Contracts due for delivery on 9 March 2022 and any subsequent Prompt Date in relation to which delivery is not practicable (as determined by the LME and notified to the market) owing to a trading suspension in line with the process in this Notice.
Obviously that’s bad! You don’t want to break trades! The whole point of an exchange is that it is a transparent and predictable place to agree to trades. On the other hand if price moves are too wild, and if they are driven too much by margin calls, you’re going to blow up enough exchange participants to undermine predictability anyway. (If a lot of traders go bankrupt, it is hard to avoid breaking trades. If some of those traders are nickel producers, bankrupting them due to soaring nickel prices is an especially bad idea: You need them to make some more nickel!)
So you shut everything down for a while, including retroactively, and hope that everyone can get their financing in order to make for an orderly reopening. In theory, if the people caught in the short squeeze are in fact largely big nickel producers, this should work. If you’re a nickel producer your nickel should be worth more now, and probably someone will give you some money for it.[4]
On the other hand if you’re a retail investor who was three times short nickel, this was not your week:
Investors in a niche leveraged product betting against nickel have been wiped out after the metal’s historic surge this week. Issuer WisdomTree Investments announced that the Nickel 3x Daily Short exchange-traded commodity (ticker 3NIS), which aims to deliver three times the inverse performance of the commodity, will be redeemed following “extreme and continual” movements in the metal’s price.
Elsewhere a nickel (the U.S. 5-cent coin) now contains 4.7 cents’ worth of nickel and 3.9 cents’ worth of copper so, you know, get melting.
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