Nickel The other Commodity

Nickel…The other Commodity

Oil prices are going sky-high and have become a huge cause of concern
But oil is not the only commodity that is rising.
On 9th March Nickel also broke all records by rising 111% to $100,000 /
tonne The rise was so huge & impactful that the London Metal Exchange
(LME) had to halt nickel trading. Let us analyse this phenomenon
What is a Short Squeeze…
If you notice, how for the last two years the root cause of everything was
COVID? Seems like this year’s root cause is going to be the Russia-
Ukraine war.
Russia is the third largest producer of nickel. But, have the supplies
been threatened so much that the prices have shot up 111%?
Not really. The real reason is technical & in investment parlance ,called a
short squeeze.
When people trade in futures contracts, they can take bets on whether
the price of a commodity or stock will rise (a long call) or fall (a short
call).
The second process is called short selling When people take such long
or short bets, they don’t own the commodity. They are just borrowing it.
Yes, that’s a thing you can do: borrow commodities and sell them on the
market.But what is borrowed must be returned.
So, essentially what short-sellers do is borrow when the price is high and
sell it. Wait for the price to fall, buy the commodity at that point in time
and return it to the exchange.But then here is the catch….

What if the price the commodity doesn’t fall?

Then you have a situation like the current one.

For the last few months, major market players including the Chinese

Tsingshan Holding Group (the world’s largest nickel and steel producer)

had been shorting nickel, betting that its prices would go down.

But the prices went up.

Now, as these people were just borrowing the nickel, they had to pay a

margin or a fee to secure their short position.

This margin keeps increasing if your bet goes wrong.

So, if you’re hoping nickel prices will fall and they rise, you have to keep

paying additional money to hold that short position until the price actually

falls and you can buy nickel at a low price.

But since the price rose so much, the short-sellers didn’t have enough

money to pay their margins.

They had to buy nickel at the super inflated price as they now had to

close their position and return the commodity to the exchange.

Now, what happens when you buy a lot of one commodity at the same

time?

The price rises further!

That’s exactly what pushed nickel to record highs on 9th March

And Tsinghshan is now looking down at losses worth $8 billion

This was a historic short squeeze. But this is definitely not the first time

this has happened.

Back in 1985 LME had to stop tin trading for five years because of a

similar incident gone wrong.

The high nickel prices will impact certain industries like the electric

vehicle industry which uses nickel to make EV batteries.

But most of us won’t be affected as nickel is not a staple commodity like

oil or food.

Moreover, analysts are betting prices will fall soon. Because a number of

Chinese nickel mining plants are currently being set up in Indonesia,

which will boost supply again.

So, it is still the rising oil prices that we need to worry about.