Thread by @smallcapsteve

Here is my attempt at explaining the Nickel Short Squeeze we experienced over the last few days. Which has seen a Chinese Stainless Steel Producer, Tsingshan, get squeezed so badly the LME was forced to suspend nickel trading and cancel a bunch of trades. #nickel #nickelsqueeze

Tsingshan is the world's largest stainless steel producer. Owned by Chinese entrepreneur Xiang Guangda aka “Big Shot”.

Tsignshan pioneered nickel processing through Rotary Kiln Electric Furnace (RKEF) to produce “nickel pig iron”; a product that contains somewhere between 2% and 13% nickel, and a bunch of other junk, mostly iron, at a greatly reduced cost.

The innovation of nickel pig iron shook up the stainless industry. By 2016, they no longer wanted to buy 25% concentrate from the likes of Vale $VALE, and began to get their own material out of Indonesia weighing down the price of nickel throughout the 2010s.

Nickel’s primary use is in alloys, especially stainless steel, but also in the electroplating of handguns, and increasingly in batteries, which need a much higher grade than nickel pig iron. Herein lies the problem.

Thanks to EVs, we started to see demand pick up late last year. Parlay that with the Russia Ukraine Crisis and suddenly were in overdrive. If you're keeping score at home, Russia produces around 12 percent of the Global Nickel Supply.

Tsingshan was short. Not kind of short, like 100,000 tonnes short. In simple terms. They bet the price would go down, it didn't. The problem? They don't produce the pure nickel (uncut >99.8% Ni) the LME uses, so they can't deliver against the contracts.

Often in commodity markets, short-sellers are locking in profits. It's called hedging - it is sensible for budgeting purposes. Barrick may have short-sold gold the last few days at $2000, thinking they can cover with paper around $1700 or just cover with bars of gold.

Perhaps, Xiang Guanda had massive confidence in a new type of nickel Tsingshan was working on for EVs called "Nickel Matte" and he wanted to lock in profits. "Hey, if it works, they gotta lock in today's inflated nickel price... right?"

But thanks to the Russia Ukraine crisis, as the price crept up, traders saw Tsingshan start buying the spot market and they knew it was game on! This created a short squeeze. A vicious cycle where traders pile in on the long side, as shorts are forced to cover (see GameStop $GME

Javier Blas from Bloomberg tells us, this position was built over months. And was a terribly kept secret.

The March 7th move was a 30 standard deviation event. To put this in context, Black Monday was a 21 standard deviation event. Over the course of just a few days, we saw the price of nickel go from ~$25,000/tonne to ~$102,000/tonne

Typically when a trade goes against you, you get a call from your broker asking to increase your margin (cash balance). The LME tried to buy one broker some time giving China Construction Bank Corp extra time to pay hundreds of millions. It wasn't enough.

So the LME turned to two drastic measures:
1) they suspended trading of nickel until further notice
2) they canceled trades that happened retroactively to March 8th

If you want to see our research and notes on this topic, see our full write up here:

thedeepdive.ca/nickel-volatil…

[end]