In March 2022, the price of nickel metal on the London Metal Exchange (LME) rose sharply all the way and once exceeded 100,000 US dollars per ton. The LME was forced to suspend trading. It was rumored that capital was squeezing the privately-owned Chinese giant Tsingshan Group that was shorting and hedging.
On March 7, without any warning, the price of nickel suddenly showed abnormal fluctuations. Starting from nearly $30,000 per ton, it gradually climbed and surged to $55,000. Eventually, the single-day increase was as high as 73.93%, setting a new historical high. However, before many traders could recover from their astonishment, such a scene was repeated the next day. As the nickel price gradually broke through the psychological thresholds of $80,000 and $90,000 and even $100,000, all the short sellers in the nickel market fell into a state of despair. Within just two days, the cumulative increase was as high as 248%. For an ordinary person who is not involved in nickel trading, this might just be a topic of conversation after meals. But for Xiang Guangda and Tsingshan Group, it means an unprecedented crisis.
As disclosed by China Fund News, Tsingshan Group holds approximately 200,000 tons of short positions in nickel metal. Let’s do a calculation. Based on this position, a simple estimation shows that for every $10,000 increase per ton in the price of nickel metal, Tsingshan Group will endure a fluctuation of $2 billion. If we calculate directly based on the peak price of $100,000 per ton during this sharp price surge, Tsingshan Group may suffer losses of up to tens of billions of dollars at most. However, according to the 2021 Hurun China 500 ranking, the total value of Tsingshan Group is about more than 51 billion yuan. The implications of a loss that may directly exceed the total value of the company presumably need no further elaboration.
All of a sudden, Xiang Guangda, an entrepreneur originally known for his “low profile”, was thrust into the spotlight. Just when everyone was worried about Tsingshan, on March 15, Tsingshan Group issued an announcement stating that it had reached a standstill agreement with a syndicate composed of futures bank creditors. During the standstill period, the participating futures banks agreed not to close out Tsingshan’s positions or demand an increase in margin for existing positions. The release of this announcement means that the crisis of Tsingshan Group has been lifted. Next, a normal and reasonable price will be negotiated for delivery. Although only eight days have passed from the occurrence to the subsiding of this “roller coaster” event, during this period, the situation was full of uncertainties. With just a little carelessness, everything could be lost.
1.China’s King of Nickel
In 1992, Xiang Guangda and Zhang Jimin jointly founded Zhejiang Fengye Group and embarked on the road of steel entrepreneurship, becoming China’s first private enterprise to produce steel. Since then, they have been involved with nickel. In 1998, Xiang Guangda and Zhang Jimin and others founded Zhejiang Tsingshan Special Steel Co., Ltd.
Thanks to the policy support of China at that time, a construction boom swept across the country. Stainless steel, as a basic material, had huge market demand. With the rapid development of the industry, Xiang Guangda also carried out stainless steel production projects in Zhejiang, Henan and other places, and the scale became larger and larger. But as he delved deeper into the stainless steel field, Xiang Guangda discovered a strange phenomenon in this industry.
Stainless steel contains a variety of metal materials, including nickel metal. Although China is a major steel-producing country, nickel consumption accounts for more than 50% of the global market, but more than 80% of nickel needs to be imported from abroad. This leads to the pricing power of nickel being in the hands of foreign mine owners. Facing their wanton price hikes, domestic manufacturers have no way at all, and the profit margin has been long compressed to about 4%.
“The ordinary carbon steel industry and the stainless steel industry are both constrained by resources. 60% to 70% of our stainless steel is nickel. Then who produces nickel? It is produced by foreigners.” To break free from the restraint of nickel, we must start from the source. In 2009, Xiang Guangda snatched up 47,000 hectares of laterite nickel ore in Indonesia with a large sum of money. Later, he bought mines in Indonesia, India, Zimbabwe and other countries, continuously increasing nickel-iron production and gradually ascending to the throne of the global nickel-iron leader.
According to the publicly disclosed information of Tsingshan Holding, its nickel production in 2021 reached 600,000 tons. The global mine nickel production in 2021 was 2.7 million tons. That is to say, Tsingshan Holding’s nickel production in that year accounted for about 22% of the global total. It is precisely because of such a large production volume that Tsingshan Group has always had the need for hedging against metal nickel. This is also the reason why Tsingshan Group holds a large number of short positions in metal nickel. However, such a routine operation was targeted by foreign capital, triggering this “demon nickel” dispute.
2.The “nickel anxiety“ in the highly competitive battery industry
Regarding the identity of the mysterious funds in this round of events, there are various speculations. Rumor has it that it is very likely Glencore behind the bulls, with the purpose of obtaining 60% of the equity of Tsingshan Group’s nickel mine in Indonesia. According to a report by “National Business Daily”, relevant personnel from Glencore said in response to this matter that “this statement is completely nonsense.” But the report also pointed out at the same time that some insiders believe that even if Glencore is not directly involved, it is also an indirect participant in this wave of market conditions. We cannot determine the authenticity of this matter for the time being, but it is certain that the global competition for metal nickel has indeed entered a white-hot stage.
However, there has always been a situation of short supply in the metal nickel market. According to the report released by the World Bureau of Metal Statistics (WBMS), from January to November 2021, there was a shortage in the global nickel market, and the apparent demand exceeded production by 135,700 tons. “Nickel anxiety” has become a headache for countless electric vehicle giants. There is no doubt that Xiang Guangda is exactly the one who holds the “bottleneck”. As the world’s largest commodity trader, Glencore is currently the world’s largest zinc producer, the third largest copper miner, and the largest cobalt supplier. And different from the business model of traditional bulk commodity traders who only make profits from trading spreads, Glencore has always penetrated the industrial chain with the dual identities of producer and trader, which gives it extremely strong pricing power over the commodities it holds.
3.Counterattack from a desperate situation and unexpected “losers”
Strictly speaking, the increase in the price of nickel metal is indeed reasonable in itself. Due to the impact of the Russia-Ukraine conflict, Russian nickel, which accounts for more than 20% of global refined nickel production and nearly 10% of nickel ore output, has been embargoed, which has made the already short-supplied nickel metal market even worse. However, a 248% increase within two days has clearly exceeded the scope of supply and demand, and there is a situation of artificial speculation and intention to force positions.
First of all, it should be noted that the delivery object specified by the LME is electrolytic nickel, while what Tsingshan Group mainly produces is high-grade nickel matte. Theoretically, this is indeed a loophole, but in the past, Tsingshan Group could choose to buy Russian nickel to complete the delivery. But due to the outbreak of the Russia-Ukraine conflict, Russian electrolytic nickel was disqualified for delivery, which gave foreign capital an opportunity.
According to the experience of the futures market, generally, the positions used for hedging will not hold until the final delivery stage, but will find an opposite position to close out before the delivery month. But because of this, Tsingshan Group either has to deliver 2 billion tons of electrolytic nickel, or it has to close out at the current futures price. If the latter is chosen, then it will face huge losses as mentioned at the beginning of the article.
So for Tsingshan Group, delivering spot goods has become the only choice. What foreign capital gambled on this time is that Tsingshan Group does not have enough nickel spot goods. But judging from Tsingshan’s performance later, it can only be said that foreign capital still underestimates Tsingshan Group and Xiang Guangda too much.
Tsingshan Group quickly launched a counterattack. Tsingshan Holding said that it will use its high-grade nickel matte to exchange for domestic nickel plates, and has allocated sufficient spot goods for delivery. As the person involved, Xiang Guangda responded in an interview with the media on March 8: “Foreigners do have some actions. We are actively coordinating. I received many calls today. Relevant state departments and leaders are very supportive of Tsingshan.” Now the pressure is on the foreign capital. If Tsingshan Group really completes the delivery smoothly, it means that the bulls not only fail to profit from it, but may even face a considerable amount of storage and transportation costs.
Some institutions analyzed that the temporary price speculation cannot last. Once the long-short power in the nickel futures market on the London side reverses, the aforementioned foreign capital maliciously forcing positions may face an embarrassing situation of “lifting a rock and hitting one’s own foot.” Interestingly, although the final result of the “demon nickel” incident is still unknown, the LME has taken the lead in becoming a “victim”. According to media reports, due to this unprecedented short-squeezing market, investors are angry that the LME allowed prices to soar 250% in less than two days and then retroactively canceled $3.9 billion in transactions. This directly led to the fact that since the nickel metal incident broke out, the trading volume in the LME nickel market has almost come to a standstill, and the trading activities of other LME flagship contracts have also declined.
Reproduction Notes：InvestFancy » Tsingshan “Nickel Incident”