© Reuters. FILE PHOTO: Traders work on the floor of the London Metal Exchange, in London, UK, Sept. 27, 2018. REUTERS/Simon Dawson/File Photo

By Eric Onstad

LONDON (Reuters) -Despite the turbulent, stop-start trading of nickel on the London Metal Exchange, frustrated investors who may want to move their business elsewhere have found that there are no quick and easy alternatives.

The 145-year-old institution last week suspended operations and canceled trades due to volatility that saw prices double to above $100,000 a ton within hours. A spate of technical issues after trading resumed this week has enraged traders.

Amid the chaos, some pointed to the Shanghai Futures Exchange (ShFE), where there have been few such interruptions in nickel trading, as an actual benchmark.

But a lot would have to change before ShFE could set global reference prices.

Trading on ShFE is difficult for non-Chinese, who need to bond with a Chinese entity. Then there are differences in currency and language and adjustments for excise duties and VAT, according to traders.

Shanghai also has many small-scale retail speculators, while the LME is dominated by financial institutions, manufacturers and industrial users.

“I don’t think there’s a quick fix. It’s a real problem,” said Tom Price, Liberum’s head of raw materials strategy.

“Longer term, the LME appears to be in trouble.”

The LME benchmark nickel contract fell to $41,945 per tonne Thursday, reaching its daily limit for the second day in a row.

Traders said it would likely continue to fall until it equates to the price of the metal in China at around $34,300 per tonne.

However, European industrial users did not flock to Shanghai, a trader at an LME ring trader said.

“I don’t see any physical players praising ShFE, not even the Chinese themselves, but in the longer term, the LME needs to get its house in order,” he said.

The LME called last week’s situation “unprecedented”.

“However, we fully recognize that we should consider taking action to prevent such a situation from happening again,” a spokesperson said. “We will carefully consider all appropriate future steps we can take to further build the resilience of the market.”

ShFE was not immediately available for comment.

Price said that until orderly trading in the LME nickel contract resumes, some local physical buyers may need to somehow link their businesses to exchange prices reported before the disruption.


In the longer term, China, as the world’s largest consumer and producer of many commodities, wants to play a greater role in setting world prices.

“The nickel futures incident highlights the importance and urgency of promoting internationalization of relevant nonferrous metal futures,” said Duan Shaofu, an official of the China Nonferrous Metals Industry Association.

Establishing China-based international base metal contracts would bolster China’s commodities pricing power, he added in an article posted on the group’s website Thursday.

New international contracts could follow the example of a contract open to foreign traders launched in 2020 on the Shanghai International Energy Exchange (INE). https://reut.rs/3D4xbuF


Another possibility is that the CME Group Inc (NASDAQ:) launches a nickel contract alongside its successful copper futures.

The CME declined to comment.

While it has rolled out contracts in aluminum, zinc and lead, they have failed to gain momentum so far.

Copper performs strongly on the CME because its contract, with a traditional monthly settlement date, is convenient for hedge funds and speculators who often use the metal as a proxy for the global economy.

Complex LME contracts, on the other hand, allow trading on a single day for the first three months, set up to allow miners and industrial consumers to cover physical shipments for odd time periods.

The physical base of the LME, which is owned by Hong Kong Exchanges and Clearing Ltd., will make it difficult to separate the exchange from setting global benchmarks, despite the current ruts.

“I don’t think the LME will be easily replaced,” said a Chinese industry source in London. “I know a lot of people are disappointed and angry, but I think there is still a strong reason for the LME.”

This post Investors feel they have no easy alternative to chaotic LME nickel trading

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