Castle Peak War "Demon Nickel"
"China News Weekly" reporter / Jiang Zhiyu
Published in the 1036th issue of "China News Weekly" on March 21, 2022
Tsingshan Holdings, the world's largest ferronickel and stainless steel producer, which has always been low-key, suffered an "epic short squeeze" and is still in the game.
In the early morning of March 15, Beijing time, Tsingshan Group announced that it had reached a silent agreement with a syndicate of futures bank creditors.
During the quiet period, Tsingshan and the syndicate will actively negotiate and implement standby and guaranteed liquidity credits, which are mainly used for Tsingshan's nickel holding margin and settlement needs.
During the silent period, the participating futures banks agree not to close the positions held by Qingshan, or require additional margin for existing positions.
Tsingshan Group shall reduce its existing positions in a reasonable and orderly manner as abnormal market conditions subside.
The climax of the "short squeeze" occurred at noon on March 8, Beijing time. Although it was still early in the morning in London, the sharp fluctuations in nickel prices were enough to keep traders awake at night.
In just an hour, the London Metal Exchange ("LME") witnessed an explosive rise in nickel prices.
At 5:33 a.m. local time, the nickel price was at $65,000/ton, and just 35 minutes later, the price soared to a record $100,000/ton.
Although it subsequently fell back to $80,000/ton, it still rose 168% from $29,800/ton on March 4.
In the past, nickel prices usually fluctuated by a few percent on a daily basis, with prices stabilizing at $10,000 to $20,000 per ton.
Unprecedented surges forced institutions to adjust.
After 8 a.m., the LME urgently announced the suspension of nickel trading and introduced a series of emergency measures.
Shortly after noon, the LME said it had decided to cancel all trading for the day in order to maintain market stability.
On March 15, the LME announced that it would reopen the nickel market at 8:00 a.m. local time on March 16.
In view of the previous abnormal fluctuations, the LME specially set a price limit applicable to all base metals in the announcement: the maximum daily increase or decrease of other base metal contracts will be the contract's closing price on the previous trading day plus or minus 15%, The price fluctuation of nickel is temporarily limited to 5%.
The LME also delayed the delivery of all nickel contracts signed before Wednesday, March 16, to March 23.
Tsingshan management's efforts to resolve the crisis, whether it will eventually bear fruit or not is still up in the air.
Is it hedging or speculation?
Nickel is a silver-white metal, and stainless steel products made from it are widely used in daily life. It is also one of the important raw materials for power batteries.
For nickel producers, in order to avoid or reduce the loss of adverse price changes, it is a common operation to prevent risks by temporarily replacing physical transactions with futures trading to do "hedging".
Founded in Wenzhou in 1988, Tsingshan Group is the world's largest integrated industry from laterite nickel ore to ferronickel and stainless steel.
One-third of Tsingshan's stainless steel production capacity is built in Indonesia, the country with the largest nickel reserves in the world.
According to open source securities data, Indonesia's output in 2021 will reach 1 million tons, accounting for 37.04% of the world's total, making it the world's largest nickel producer.
With the market share of new energy vehicles increasing year by year, the demand for nickel has gradually increased. From the beginning of 2016 to before this round of rising, the price of nickel rose from about US$8,000/ton to about US$20,000/ton.
However, as a nickel producer, Tsingshan Group has a need for hedging.
Shorting nickel means bearish nickel price. Before the conflict between Russia and Ukraine, many research institutions believed that nickel will be oversupplied in 2022, and nickel price will fall back.
Sinolink Securities estimated at the end of 2021 that the overall global nickel supply will be in excess from 2021 to 2025. With the concentrated production of ferronickel, hydrometallurgical, and pyro-nickel matte projects in Indonesia from 2022 to 2023, it is estimated that in 2022 and 2023, there will be a surplus of 290,000 tons and 32 tons respectively. tons.
According to reports, Tsingshan Group plans to produce 850,000 tons of nickel in 2022, an increase of 40% compared with the production of nearly 600,000 tons in 2021.
Xiang Guangda, the actual controller of Tsingshan, believes that the entry of so much nickel into the market will bring nickel prices down.
Tsingshan has indeed had market influence in this regard. Previously, in March 2021, Tsingshan Holdings announced the successful trial production of its high matte nickel production line. 14%.
However, from the perspective of supply and demand, global nickel inventories continued to decline, hitting a two-year low. As of March 9, LME nickel inventories were 74,778 tons.
Wang Cong, chief nickel analyst at Shanghai Nonferrous Metals Network, told China News Weekly that LME nickel inventories have dropped from more than 200,000 tons last year to less than 100,000 tons this year, and the problem of insufficient delivery has surfaced. A large number of short positions is a very dangerous thing in itself, and there may be some misjudgments in the hedging strategy of enterprises.
Yang Han, a Ph.D. in Economics from Shanghai University of Finance and Economics, wrote that there are two main motivations for Tsingshan to short nickel: "First, Tsingshan needs to short futures to hedge spot risks... Tsingshan has obtained the mining rights of 47,000 hectares of laterite nickel mine in Indonesia, and Tsingshan has the right to mine laterite nickel mines. There is a large amount of nickel spot, so Tsingshan opens a short order on the LME. If the price of nickel falls, the short order in hand will be profitable, and it will be able to hedge the risk of spot depreciation in hand. Second, based on the analysis of the supply and demand situation of nickel in the previous paragraph, from the observation of open interest , Qingshan's 200,000 tons of nickel obviously exceeds the need for hedging, but Qingshan may be based on its understanding of its own nickel production prospects. It is expected that after the supply of high-grade nickel matte increases, the nickel price will drop, so shorting nickel is Qingshan's' Market judgment'."
The seemingly reasonable motive for shorting has encountered a black swan event.
Nickel prices rose rapidly after the Russian-Ukrainian conflict.
Russia is the world's third-largest nickel producer and largest exporter of refined nickel.
The LME requires that the nickel content of nickel deliverables is not less than 99.8%, and refined nickel is its deliverable type.
Essence Securities believes that under the circumstance that nickel inventories are low and will continue to decline, the spot liquidity risk of Russian nickel has led to an increase in the risk of LME runs.
"Qingshan short-sold at a high level in the futures market to lock in relatively high-priced returns. This is a normal hedging operation of the company, and there is nothing wrong in essence." The head of the futures department of Jinchuan Group pointed out to "China News Weekly", What needs to be noted is whether its futures position matches the actual production plan.
Wang Cong believes that the risk point of Tsingshan's hedging strategy is that the nickel content of its nickel products does not meet the LME delivery standard; on the other hand, Tsingshan's short positions are too concentrated.
Futures are margin trading, that is, you only need to pay a certain percentage (for example, 10%) of the margin to trade the contract, which increases the leverage by 10 times, but when the contract price rises by 10%, the margin will be lost.
Generally speaking, there are two ways to deal with it. The first is to add margin, and the second is to complete the delivery as a short position, that is, to hand over the goods to the long position at the price on the delivery date of the futures market contract.
According to market rumors, Tsingshan Group has a short position of about 200,000 tons. Compared with its estimated annual output of 850,000 tons, some industry insiders who did not want to be named believe that whether Tsingshan is for hedging or speculative purposes, such a position is not enough. Appears too huge.
The above-mentioned industry insiders believe that, unlike copper, aluminum, zinc and other varieties, the spot market and futures market of nickel are relatively small in scale, and the market information is not very transparent, and industry leaders have obvious information advantages.
In 2018, 2019 and 2021, Tsingshan has operated the market price many times to achieve profit in the futures market.
For example, in 2019, Tsingshan made a large number of Duolun nickel contracts near US$12,000/ton, and with the news of Indonesia's early mine ban, the nickel price has been raised all the way to nearly US$19,000.
"The high nickel matte nickel content produced by Qingshan is about 75%, which does not meet the delivery standards. The electrolytic nickel production capacity that could have been used for LME delivery was 900,000 tons, and the Russian nickel production capacity was 200,000 tons, accounting for 22%. This time, Russian nickel is prohibited from using After the delivery, Tsingshan's long counterparty purchased the deliverable nickel spot in the market at the same time, resulting in a shortage of spot inventories." Yang Han wrote an article explaining that the long counterparty collected a large amount of funds at the same time, and continuously pushed up nickel prices in the futures market. " The purpose is to make Qingshan continue to lose a lot of margin, and at the same time, it cannot find spot delivery and is forcibly liquidated."
Why the "overseas market"?
"In addition to the imbalance between nickel supply and demand, Qingshan's strategic mistakes, and the conflict between Russia and Ukraine, the ineffective supervision of the LME is also an important reason for this incident." A futures industry practitioner believes that the LME's strong intervention and cancellation of all trading results on the 8th is a big deal. To a certain extent, it is a "self-help" behavior.
Founded in 1876, LME's base metal futures and options contracts account for 80% of global base metal futures trading. It is the world's largest non-ferrous metal exchange and holds the pricing power of global non-ferrous metals.
In June 2012, under the leadership of Li Xiaojia, the then former CEO of the Hong Kong Stock Exchange, the Hong Kong Stock Exchange spent 16.7 billion Hong Kong dollars to buy LME.
In a recent interview with the media, Li Xiaojia revealed that after the Hong Kong Stock Exchange spent US$2 billion to buy LME, it spent nearly US$300 million to establish the LME clearing house, and this time it was the clearing house that initiated the corresponding mechanism to cancel the transaction.
He believes that when the Hong Kong Stock Exchange purchased the LME exchange, it had already formulated a clear follow-up plan, that is, to establish a clearing house to allow all members to assign the clearing business to the LME, ensuring that the LME has the ability to deal with major market fluctuations.
"If you don't master clearing, the exchange has no 'tooth' to control the market. The exchange is only responsible for matching transactions, not positions and whether to close them. Only the clearing house can manage these things."
Xiao Cheng, a practitioner in the futures industry, told China News Weekly that from its historical perspective, the LME has gone through the spot market, the forward wholesale market and the futures market, and initially there was no limit on the price of rise and fall, which has a significant impact on the surge in nickel prices. certain influence.
For the above move, the market has different evaluations.
Some fund managers who profited from the rally were disgruntled, arguing that the intervention of trading houses undermined the market's system of punishing highly leveraged operators, and some hedge funds exited their LME positions as a result.
However, more people are supportive.
A futures practitioner who did not want to be named believes that the LME's rescue is based on the two basic functions of the futures market - price discovery and hedging.
In the "pressing position" crisis of nickel nickel, it broke through the US$100,000 mark in intraday trading on March 8, which has seriously deviated from the reality of the spot market. As a result, customers in the upper, middle and lower reaches of the industrial chain cannot quote and trade. Some short-selling companies may After the subsequent price rise, it cannot pay the margin and goes bankrupt, and its basic functions of price discovery and hedging have been threatened.
The above-mentioned people believe that for a long time, the LME has been very weak in market supervision. Compared with other futures exchanges at home and abroad, the LME has major deficiencies in risk control systems such as large position reporting, monthly delivery limit, price limit, and forced liquidation. The supervision of delivery warehouses is also very loose.
The use of LME prices as the basis for settlement of annual long orders has been questioned due to the lack of improvements to the system.
Faced with various challenges, the LME urgently needs to adjust its system.
After the "short squeeze" crisis, in addition to suspending nickel trading, the LME also hopes to "mediate" from it.
On March 10, London time, the LME issued Announcement No. 22/057, informing all members of the latest situation of the London nickel market, and said that it planned to offset long and short positions before reopening nickel trading.
However, the LME's efforts are not going well.
"The exchange has now analyzed the plan for voluntary offsetting of positions by long and short positions, and considering the limited response, it believes that this method is not suitable at present." The LME said in the latest resumption announcement.
On March 15, the LME issued the latest regulations. Among them, the newly added report on large positions and OTC reports with more than 100 lots means that the LME can know and inquire about large positions and limit positions at any time.
Wang Cong believes that this means increased supervision and more transparent transactions.
In addition, the LME has also added delivery brands, which is conducive to solving the problem of insufficient delivery products, and will implement the nickel price range setting from March 16.
The LME also delayed the delivery date for all nickel until March 23, and Wang Cong believes that the delayed delivery provides short-term delivery viability for shorts.
"In overseas markets, domestic traders are inexperienced, unfamiliar with trading rules and regulatory rules, and lack of geographical advantages, so they are easy to 'suffer'." Yang Han sorted out the famous events in the bulk derivatives market since the 20th century, for example, In 2002, CAO Singapore started to get involved in the derivatives business. The person in charge of the company, who first tasted the sweetness, judged that oil prices would gradually decline after 2004, so a large number of oil call options were sold and put options were bought. As a result, the market did not meet expectations. , oil prices rose, a loss of 5.8 million US dollars.
The company did not choose to stop the loss in time, but instead made up for the loss by selling more call options with higher strike prices to obtain the option premium, and at the same time, the extension of the put option continued to expand the risk exposure.
Finally, in November 2004, Goldman Sachs, Barclays and other international investment banks jointly squeezed their positions, and the brokers also increased their margin requirements at the same time. The two factors were superimposed, and the final loss reached 381 million US dollars.
In addition to excessive risk exposure due to excessive speculation, and risk control should be strengthened, Yang Han believes that in the process of my country's bulk commodity companies going global, we should always pay attention to the information and battlefield disadvantages caused by overseas markets. , key business information such as its own inventory is strictly confidential to avoid being pegged by opponents and become a 'wandering elephant' in the market."
The nickel industry chain is blocked
Nickel prices surged in a day, causing the LME to suspend trading for the first time in three decades and also throwing the industry into disarray.
The China Nonferrous Metals Industry Association pointed out in an answer to a reporter's question that the current nickel price is seriously deviating from the fundamentals, losing its guiding significance for spot prices, deviating from the original intention of serving the real economy, and causing serious damage to the global nickel and upstream and downstream related industries. , should guard against malicious speculation and irrational sharp rise in the price of non-ferrous metal products.
In China, the nickel market was also affected, with the Shanghai Futures Exchange trading at the daily limit.
To calm the market, the Shanghai Futures Exchange also suspended trading in some nickel contracts for a day.
Unlike the LME, however, the SHFE has caps on daily price swings to avoid wild swings, and has also raised transaction fees for nickel and other commodities.
The skyrocketing nickel price and the crisis of forced position may further lead to the dilemma of the entire nickel industry chain in the future.
On the one hand, for the largest company among them, Tsingshan Group, it means huge cash flow pressure.
In addition to the much-needed raising of hundreds of millions of dollars in margin, Tsingshan faces potential losses of billions of dollars on short positions in nickel futures.
Although Tsingshan Group is experiencing an extremely rare crisis, several industry sources told China News Weekly that this is not a traumatic impact.
Tsingshan Holdings reported $19 billion in revenue last year, and even if it encounters short-term cash flow pressures, a collapse is unlikely due to the event.
At present, the extreme short squeeze may begin to ease, and Tsingshan has reached a silent agreement with a syndicate of futures bank creditors. There are positions that require increased margin.
On the supply side, Indonesia has also publicly expressed plans to increase production.
On March 9, Indonesia's Coordinating Minister for Investment and Maritime Affairs Luhut Panjaitan said in an interview that the country plans to add as much as 400,000 tons of metallic nickel this year, bringing total output to 1.4 million tons, to ease market pressure.
However, Wang Cong believes that the ups and downs of the LME after the re-opening are unpredictable, and the event is still in the process of fermentation.
Assuming that LME prices continue to rise, all raw materials that are settled at LME prices or maintain their value in LME are difficult to accept downstream (downstreams without a sales contract are likely to reduce production and stop production), and it is difficult to sell at high prices after long-term delivery.
The LME price has a high probability of falling from a longer time dimension.
This matter also makes various enterprises in the nickel industry chain face difficulties to varying degrees.
Due to the sharp rise in nickel prices, other cathode materials have also experienced price increases of varying degrees, and the cost pressure of downstream manufacturers has suddenly increased.
The stock prices of companies related to Tsingshan plummeted frequently. On March 9, Zhejiang Huayou Cobalt Co., Ltd. fell by 10%, and GEM, China Molybdenum and CNGR New Materials all fell by more than 5%.
"The industry has lost its benchmark for pricing," said the head of the futures department of Jinchuan Group, which has been engaged in nickel industry futures trading for a long time. China is the world's largest nickel consumer, but its nickel resources are poor, and its dependence on foreign raw materials exceeds 90%.
When importing nickel products and signing annual long-term orders, China's imported nickel raw materials generally use the LME nickel price as the pricing benchmark.
Now, the LME nickel price has lost its function as a price benchmark for a short time.
The aforementioned person in charge of the futures department of Jinchuan Group believes that the sharp rise and fall have brought a great impact on the spot and futures markets. The upstream and downstream enterprises in the spot have reduced production, stopped taking orders, and trade is close to stagnation; the LME in the futures market has been suspended, The continuous up and down limit of the Shanghai Futures Exchange has resulted in the inability of real enterprises and trading units to conduct normal transactions, and has also formed obstacles to corporate hedging.
The nickel downstream power battery industry is also under pressure.
Nickel and lithium are recognized bottlenecks for power batteries. Zou Jueping, senior analyst of battery materials at Richard Energy, told China News Weekly that due to the lack of LME pricing standards, Chinese producers of nickel sulfate for electric vehicle batteries have stopped quoting , If nickel prices continue to rise, automakers may consider whether to adopt a high-nickel battery-powered technology model.
Many industry insiders admitted that the disorderly fluctuation of nickel prices has seriously disrupted the normal order of production and operation of the industrial chain, and it is the wish of enterprises in the industrial chain to calm down as soon as possible. "Currently, the upstream and downstream of the industrial chain are basically in a semi-stagnant state."
As of press time, "China News Weekly" has not been able to obtain a reply from Tsingshan Holdings on the interview.
"At present, it seems that it is difficult for Qingshan to retreat completely, and may suffer some losses, but it will not be as much as the $8 billion rumored in the market." Yang Han believes that, on the other hand, if the current price is more than $50,000 per ton Buying back a lot of nickel plates at a high price, such a loss is also unbearable for the long counterparty. "There is a high probability that Qingshan and the long counterparty may close their positions at the agreed price. The key is the level of the agreed price."
"The futures and spot markets have all failed. As far as this incident is concerned, whether it is to take advantage of the spot to go short or to take advantage of the capital to go long, it will hurt the participants in the entire industry." The bureau, the central bank, and the General Administration of Customs can work together to open a channel for free circulation under effective supervision, so that powerful Chinese and foreign companies can hedge in the channel, instead of using offshore companies to hedge, as in the past. The companies that go out will bring the prices out, and the companies that come in will bring the prices back, so that they can truly fully participate in international competition and fully exchange prices to gain the right to speak.
At the same time, the path and regulatory measures for domestic enterprises to participate in hedging in overseas futures markets should also be discussed.
"China News Weekly" 2022 Issue 10
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