Commodities | Aug 18 2006
By Greg Peel
Someone out there is sitting on a very large short position in nickel, and it is hurting. With delivery approaching, nickel inventories are down to just one day of consumption. To avoid some disastrous defaults, the London Metal Exchange has been forced to act.
No one expects demand for nickel to abate much this decade given its primary use in stainless steel and the voracious appetite of the developing world. Moreover, there appear to be no signs of substitution for the metal. The supply side is facing severe difficulties, the latest been another mineworker strike, this time at Canada’s massive Voisey Bay. The only major new supply sources, owned by Inco and BHP Billiton (BHP), will take years to come on line.
As the nickel price has continually pushed towards higher highs, the London Metals Exchange had already introduced a default-prevention system that saw short position holders “borrowing” nickel from long holders to avoid forced rollovers in to latter months that would push forward dates ever higher, or to avoid simple delivery defaults that would throw the system into some level of chaos.
Since this initiative began, the situation has only become worse. This has prompted the LME to take the unprecedented step of imposing a “backwardation limit” of US$300/t per day while suspending the lending system. What this means is that anyone with a short nickel position may suspend delivery against the contract at the fixed penalty of US$300/t per day.
As at last night, LME stocks were just 6,120t with 5,000t already booked out. What’s left is not enough physical metal to prop up a lending system.
Barclays Capital reports LME chief Simon Heale commented “Nickel stocks are at historically low levels and we now have a genuine material shortage. Our first priority is to ensure that trading remains orderly and to prevent the risk of settlement defaults”.
LME records show one single trader accounts for 30-40% of the short positions on the exchange at present. The Wall Street Journal has pointed the finger at Korean company POSCO, the world’s fifth largest steel-maker, which it suggests is short 10,000t on the LME and another 20,000t on the physical market. Mineweb.com reports POSCO has denied all reports.
The response in the overnight market was swift, with nickel falling 2.5% on the knowledge that rollover upside pressure would now be limited. This was on a night when all metals were trashed, probably on weaker economic indicators emanating from the US. (I say probably because one report I read said copper was down 4.5% because gold was down, and another said gold was down because copper was down).