‘Big Shot’ Blows Up London Metal Exchange With Big Short

Things took a turn for the absurd on Tuesday, when the LME was forced to suspend the nickel market after a truly silly squeeze pushed prices beyond $100,000 a ton.

“The LME… has been monitoring the market and the effect of the evolving situation in Russia and Ukraine,” a member notice said. “It is evident that this has affected the nickel market in particular.”

It was, indeed, quite “evident.” The figure (below) is simultaneously incredible and meaningless.

That’s chaos precipitated by margin calls which, the LME said Tuesday, will be calculated based on Monday’s close — so, based on prices that were some 50% below Tuesday’s high, illustrated by the red dot in the figure (above). Trades made between Monday’s close and Tuesday’s market suspension may be canceled or “subject to reversal or adjustment,” as the notice put it.

Late Monday, the exchange imposed a backwardation limit and introduced a deferred delivery mechanism for certain contracts, emergency moves it said were necessary to “maintain market orderliness, whilst ensuring liquidity continues to be made available in nearby carries should the evolving situation lead to further physical market tightness.”

Apparently, this is in no small part due to a massive short position held by Chinese entrepreneur Xiang Guangda, also known as the “Big Shot” (Because of course he is. No blowup would be complete without a ridiculous nickname). The Big Shot’s big short stems from his holding company, Tsingshan, which is the world’s largest nickel and stainless steel producer. Needless to say, Tsingshan is now getting margin calls, and that’s making things worse, in what’s now morphed into an existential spiral.

Of course, when things like this happen, there’s always a bank involved somewhere, and in this case it’s China Construction Bank or, more accurately, a unit thereof. CCBI Global Markets missed “hundreds of millions of dollars” worth of margin calls on Monday, according to sources who spoke to Bloomberg. LME gave the broker more time to pay, so it wasn’t “formally” in default. The brokerage eventually paid the outstanding amount.

As you can imagine, Beijing isn’t amused with this situation. On Tuesday, regulators including the Assets Supervision and Administration Commission told major state-run entities to disclose their exposure to energy and commodity-linked derivatives and to calculate prospective losses. That’s according to more unnamed sources, who also said “at least two Chinese banks held urgent internal meetings about their clients’ exposure.”

For its part, the LME is “actively plan[ning] for the reopening of the nickel market,” but didn’t initially provide a date. The exchange said only that it’ll “announce the mechanics… as soon as possible.” It’s conceivable that a multi-day closure is in the cards “given the geopolitical situation which underlies recent price moves.”

A separate Bloomberg article from February described a standoff between the Big Shot and “mystery” nickel stockpilers at the LME. “It’s unclear how much of a risk the nickel rally poses to Xiang’s closely held Tsingshan Holding Group,” the linked piece, published on Valentine’s Day, remarked.

In comments carried by Yicai on Tuesday, the Big Shot insisted that Tsingshan has “no problems” with its positions or operations. All “relevant government departments and leaders are quite supportive,” Xiang said.

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4 thoughts on “‘Big Shot’ Blows Up London Metal Exchange With Big Short

    1. Exchanges will change up rules to cater to whales that fuck up. CBOE does it for fat finger trades, I’m sure others as well. It’s like the house comping a suite to a high roller, you want to keep that revenue source coming back for more.

  1. A commodity producer, using futures or other financial contracts on that commodity to hedge its physical production, normally expects that those futures bear some reasonable relationship to the physical spot. To the extent they don’t, the usefulness of the futures market is reduced and ultimately the role of the exchange could be threatened. It is in the exchange’s interest, I would think, that financial nickel doesn’t go stratospheric in price or vol and bankrupt the exchange’s customers. I’m kind of surprised that there aren’t daily limits or circuit breakers or similar on these instruments as a normal matter.

  2. I’m surprised the exchange doesn’t allow producers to hedge their shorts, at least partially, with proven reserves. One learns something new every day.

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