Nickel prices soared by 250% in a matter of a few days.
Here's a short thread on what's happening 🧵👇
Image Source: Bloomberg
#nickelsqueeze
Here's a short thread on what's happening 🧵👇
Image Source: Bloomberg
#nickelsqueeze
1/ What is Nickel and where is it used?
Nickel is the fifth most common element on earth. It is used in the production of stainless steel and electric vehicle batteries.
Nickel is the fifth most common element on earth. It is used in the production of stainless steel and electric vehicle batteries.
2/ About 68% of the world's nickel production is used in stainless steel, 17% is used for alloys, 8% in plating, 3% in foundries, and 4% in other applications, including EV battery manufacturing.
3/ Who manufactures Nickel?
The top 5 countries by % of the global production are -
Indonesia: 38%
Philippines: 4%
Russia: 9%
New Caledonia: 7%
Australia: 6%
The top 5 countries by % of the global production are -
Indonesia: 38%
Philippines: 4%
Russia: 9%
New Caledonia: 7%
Australia: 6%
4/ So, why did Nickel prices start increasing?
Because of the Russia-Ukraine war, there are concerns over supply disruptions since Russia produces 9% of the Nickel and Russian company Nornickel mines 10% of the Nickel globally.
Because of the Russia-Ukraine war, there are concerns over supply disruptions since Russia produces 9% of the Nickel and Russian company Nornickel mines 10% of the Nickel globally.
5/ But what made the price go up by 250%?
It is a phenomenon called a short squeeze.
Here’s how it works - Commodity prices keep on fluctuating based on demand and supply.
It is a phenomenon called a short squeeze.
Here’s how it works - Commodity prices keep on fluctuating based on demand and supply.
6/ While rising commodity prices are good for companies selling commodities, companies are worried about what happens if the commodity's price falls, and in that case, they are left with no other option but to sell at a lower price.
7/ The solution: open what is called a “short” position.
How? You borrow the commodity and sell it at the current market price when you are short. You would then repurchase the same commodity for less money when the price is lower and return it. So the price drop is your profit.
How? You borrow the commodity and sell it at the current market price when you are short. You would then repurchase the same commodity for less money when the price is lower and return it. So the price drop is your profit.
8/ But what happens when prices go up?
That’s where this gets risky. If the price goes up, you still need to buy back the commodity you borrowed and sold.
The higher your buyback price, the bigger your losses.
That’s where this gets risky. If the price goes up, you still need to buy back the commodity you borrowed and sold.
The higher your buyback price, the bigger your losses.
9/ Theoretically, the price could go up infinitely, right? So by shorting, you open yourself up to infinite losses.
10/ Now what’s a short-squeeze?
When the commodity prices start rising quickly, companies with big short positions start buying the commodity to trim their losses.
This, in turn, leads to even higher prices because the demand has increased. This is called a short squeeze.
When the commodity prices start rising quickly, companies with big short positions start buying the commodity to trim their losses.
This, in turn, leads to even higher prices because the demand has increased. This is called a short squeeze.
11/ In Nickle’s case one such company, Tsingshan, had a large short position.
12/ They were under the impression that the prices of Nickel would fall, and they could benefit from the falling price. But instead, because of the Russia-Ukraine war, market participants realised that supply would be affected and that the prices would increase.
13/ The result?
Companies/Traders (Tsingshan being one of them) with short positions rushed to market to buy Nickel to close their short position (i.e. return their borrowed Nickle and control losses). In the process, the prices went up further.
Companies/Traders (Tsingshan being one of them) with short positions rushed to market to buy Nickel to close their short position (i.e. return their borrowed Nickle and control losses). In the process, the prices went up further.
14/ London Metal Exchange (LME), where Nickel is traded, realised that this situation could create a massive issue worldwide and stopped Nickel's trading on the exchange.
15/ This is the perfect example of why shorting is dangerous compared to regular investing.
With investing, you only lose what you have put in. Shorts have unlimited loss potential.
#nickelsqueeze
With investing, you only lose what you have put in. Shorts have unlimited loss potential.
#nickelsqueeze
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