Trust warning over LME nickel suspension

The huge jump in nickel prices in early March and the response of the London Metal Exchange was ‘a harrowing experience’ which widened the trust deficit between the exchange and physical markets, according to leading member of the non-ferrous scrap community.

Dhawal Shah, president of BIR’s non-ferrous metals division, was commenting on both the LME situation and Russia’s attack on Ukraine in the world recycling organisation’s latest Mirror. The managing director of Metco Ventures in India says: ‘Humanity is going through one of its darkest times with the conflict in Ukraine. The entire BIR non-ferrous metals board stands united at this time of crisis.’

He goes on: ‘Economic sanctions announced against Russia, as well as estimates of resulting material deficits, have caused some huge gyrations in the metals complex this month.’

Shah points out that this prompted the LME had to suspend its nickel contract and unwind thousands of deals in response to a 250% spike in values over just two sessions, a scenario last seen in 1985 when tin trading was suspended.

Legal challenge

‘Suspension of the nickel contract has raised questions over the sanctity, transparency and efficiency of the 145-year-old exchange,’ he argues. ‘It is estimated that around US$ 1.3 billion (EUR 1.2 billion) of profit and loss was wiped off through those deals. This did not go down well with those holding long positions, some of whom are seeking legal recourse.

‘It has been a harrowing experience overall for the manufacturers, consumers and processors who use this platform to hedge and offset forward risks. It has widened the trust deficit between the exchange and physical markets, with the latter consistently scrambling to pay up overnight margin calls in addition to maintaining the price balance of its entire value chain.’

Shah also reflects on a rise in Covid cases in China and Hong Kong, stoking fears of a new wave of the virus. ‘Commodity markets have already seen hyper-volatility on account of the Ukraine conflict, financial sanctions, the energy crisis, growing inflation, etc. Covid spreading its tentacles once again would be another bitter blow,’ he warns.

US volatility

Volatility was highlighted by an US member of the board, Rick Dobkin from Shapiro Metals, who reports historic highs and variability.

‘Typically tame commodities like aluminium saw 20% swings in value within a few days,’ he writes. ‘The Midwest aluminium premium continues to break its record highs, currently sitting around US$ 875 per tonne and up more than 15% since the previous Mirror; the premium continues to rise on the back of increased freight charges owing to higher fuel costs and lack of capacity.

‘On the scrap side, mills did not seem to chase the recent price increases as they awaited a reversal towards previous levels. Demand is still good for rolling mills and billet cast houses, with profile spreads stable and some mill grades widening with the improved terminal markets.’

Domestic Chinese recycling

Also in the Mirror, Ma Hongchang, a member of the board with expert knowledge of China, points out that domestic recycling of aluminium scrap has increased steadily over the last 20 years. After melting and regeneration, applications for the recycled aluminium can be divided roughly into castings (die-casting alloys), recycled rod and plate, strip and foil (grade-guaranteed alloys). In 2019, around 70% of domestic scrap aluminium regeneration went into die-casting alloys and the remaining 30% into deformed alloys. Around 80% was ultimately used as castings, 15% of generated rods were used as profiles and the remaining 5% flowed to plate, strip and foil.

He makes three points on these trends:

• The contribution of ‘urban mining’ to the increase in scrap aluminium
• High aluminium prices and policy guidance have driven improvement in scrap aluminium recovery channels
• With the upgrading of technology and a higher proportion of large-scale recovery capacity, the yield of various types of scrap aluminium models has increased, as has the proportion of guaranteed grade utilization.