Is the LME’s Role as the Go-to-Price Point for Nickel Over?

Doomsters have predicted the end of the LME before. Still, after 146 years and counting, the LME is still with us and the go-to nickel price point. However, volumes have tanked since the LME nickel debacle in March of 2022. In fact, the problems no longer relate just to nickel, but the entire non-ferrous metals spectrum.

The suspension of LME nickel trading and the decision to cancel trades remains the catalyst. According to Reuters, volumes continue to fall every month year-over-year. Core activity on the LME contracted by 8.3% over the course of 2022. Meanwhile, the 127 million lots traded represents the lowest turnover since 2010.

To make matters worse, all the LME’s main contracts recorded drops in volume. Aluminum is down by 9%, lead by 4%, and zinc by 3%. Copper proved the most resilient, with a year-over-year volume decline of under 2%. The article largely credits this to a pick-up in action over the fourth quarter.

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China’s SHFE Mirrors the LME Amid Nickel Price Volatility

As the Reuters article indicates, the LME isn’t alone. China’s SHFE has suffered an even worse collapse in volumes. This is largely due to the country being in rolling lockdowns throughout 2022. However, the SHFE nickel contract collapse closely aligned with the LME nickel March meltdown and suspension of trading. Ultimately, nickel volumes collapsed by 70% in 2022. But despite lockdowns disrupting trade, the SHFE’s copper, aluminum, and zinc options contracts registered year-on-year growth of 36%, 50%, and 89%, respectively.

High pricing, high margins required by the exchanges in the face of considerable volatility, and a high level of uncertainty all played their part in dissuading participants on the LME. Moreover, the need to hedge against volatility remains, and options seemed to benefit where deliverable contracts lost out.

For instance, the CME’s monthly copper options contract saw a 41% rise in trading activity. This included market open interest of 82,599 contracts at the end of the year, a record high. Meanwhile, steel contracts such as the HRC hit a record of 260,885 lots, equivalent to over five million tonnes. The steel scrap contract also managed to benefit from increased volumes.

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LME Nickel Continues to See New Challengers

Adding to the chaos are the emerging challengers to the LME Nickel contract. For instance, Global Commodities Holdings plans to launch its own nickel price index by the end of the first quarter. The company, headed up by ex-LME CEO Martin Abbott, already operates the globalCOAL trading platform. In act, GlobalCOAL already has the backing of mining companies like Anglo and BHP and major trading houses such as Glencore and Trafigura.

The SHFE Nickel contract previously enjoyed significant volumes and liquidity. However, like the LME Nickel contract, it failed to recover from last year’s meltdown. This leaves the door open for what many experts would consider an unthinkable possibility before now. That is, that a rank outsider like globalCOAL could come in and eat their lunch.

The obvious challenger would have been the CME. However, the North American exchange has not shown any inclination to offer a competitive product. Instead, it prefers to focus on potentially higher-volume products like steel.

All this uncertainty around nickel price discovery comes at a critical time for a metal with rapidly-evolving uses. An excellent example is nickel’s new role as a battery metal in the form of Nickel Sulphate. What’s more, traditional applications in alloying to form stainless steel, nickel plating, and alloying with copper and zinc continue to expand.

Issues with Nickel Price Exchanges

Like Cobalt and Lithium, the elemental metal’s price performance does not always precisely correlate with that of its salts. This opens the door for alternative mechanisms to price such materials outside traditional exchanges. However, price discovery for Class 1 nickel remains crucial for setting the monthly stainless steel surcharge used by mills worldwide. Of course, this price mechanism was heavily undermined by the LME’s shaky correlation to physical metal market prices.

Whether globalCOAL’s trading platform will eventually emerge as the preferred pricing platform remains to be seen. It typically takes 2-5 years for a new contract to develop any real volume and, hence, liquidity. Whether the LME can heal its wounds and return to its historic preeminence is yet another variable.

Either way, nickel prices, like those of cobalt and lithium, are in for considerable evolution over the coming years. Perhaps the biggest question is how much of a role LME Nickel will continue to play in that process.

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