Full Metal Racket

Nickel is a metal used in electric cars and stainless steel. Russia produces 20% of the world’s supply. So when Russia invaded Ukraine, obviously people were concerned about that supply and the price rocketed, from around $29,000 a ton to over $100,000.

Ordinarily, nickel doesn’t move much and floats between $10,000 and $20,000. So this was a serious and unprecedented move in price. However, one Chinese company, owned by a guy known as ‘Big Shot’ (seriously) had attempted to short the market. His firm Tsingshan was apparently on the hook for tens of billions.

But the London Metal Exchange, which for some historical reason is allowed to set the global market price for most base metals, decided to undo the trading. Not suspend it (they tried that too) but actively cancel all the trades.

Bug, Pee-Wee and Shrek deciding the price of base metals on their nice red sofa.

This has made some people who thought they’d made lots of money very unhappy. It may be mere coincidence that the LME was bought out by the Hong Kong Stock Exchange a number of years ago, of course.

Lawsuits are now flying, and the price of nickel is back to around $30,000 a ton at the time of writing, only a little above where it was before the invasion.

But I’m still a little confused why a boy’s club where many of the traders are related to one another and go by nicknames like Bug, Shrek and Pee-Wee, where daytime drinking was recently the norm, and where trading only happens on Wednesdays, and must be conducted while sitting on a giant red circular sofa is considered the best and only method for deciding the prices of most of the metals we use on Earth.

The Chinese now want to run the world’s metal markets themselves, but I’m not sure that would entirely resolve the problem.

The fundamental problem is inherent to the five century old stock exchange system itself, and a small market like nickel with a singular point of price discovery like the LME simply exposes the flaws of this antiquated method for setting prices.

It shouldn’t be possible for a commodities market in an industrial metal like nickel to literally treble in a matter of a day, no matter how supply might be threatened. Nor should it be possible for a single man to short an entire commodity market to the extent that he did. Nor should it be possible for agreed deals to be undone.

Here we have an example of traditional rules-bound capitalism – a largely closed shop with its weird in-group habits – but as soon as the market became systemically challenged by its own methodologies, all those rules and traditions were jettisoned with shocking disregard.

I don’t think you get to come back from that. I think the day of the red sofa is likely over.

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