The war in Ukraine caused the Chinese nickel baron to lose record sums on Tuesday, March 8.
Entrepreneur Xiang Guangda, nicknamed "Big Shot" in the financial community, paid a very high price - at least 2 billion dollars - for risky bets on the fall in the price of nickel while the invasion of Ukraine led to a historic surge in the prices of this raw material.
This sexagenarian, at the head of Tsingshan Holding, the world's number one in stainless steel, is one of the largest buyers of nickel, which is the basic ingredient of the metal produced in its factories.
Miscalculation for the Chinese billionaire
Xiang Guangda began to bet at the beginning of 2021 and always stronger on the fall in nickel prices.
An astonishing choice: this raw material is central to the manufacture of batteries used by some of the most promising sectors such as electric cars.
The demand for nickel – driven by fans of Tesla and other “green” cars – is therefore not about to collapse.
This is why most traders have rather bet in recent months on the rise in nickel prices.
But not Xiang Guangda.
"He probably felt that the price set by the market already included all the growth potential of sectors such as the electric car and that there was therefore no reason for the price of nickel to continue to climb", notes Alexandre Baradez , analyst for IG France, contacted by France 24.
Another, more technical reason is what is known as "risk hedging".
Tsingshan Holding indeed pre-orders large quantities of nickel to manufacture its steel.
If the price of this raw material were to drop, the group would have paid much more for the nickel than what it cost when it was delivered to it.
By betting, in parallel, on the fall, Xiang Guangda thought to be smarter than the market and to "cover" this eventuality of a fall in prices.
The Russian decision to invade Ukraine did not change its mind or strategy.
Still, Russia is a country that counts on the nickel map.
“Western sanctions have hit the world number 1 in nickel, the Russian Norilsk, with full force,” recalls the daily Le Monde.
As a result, nickel risks becoming increasingly rare on the markets.
And who says rarity, says soaring prices.
Concretely, "buyers increasingly want to get their hands on the precious raw material, but those who have it, anticipating that the price will rise, refuse to sell, pushing buyers to offer ever higher prices in the hope to convince sellers", explains Alexandre Baradez.
This is how the surge in nickel prices put Xiang Guangda in a most uncomfortable stock market situation.
The London Metal Exchange (LME) - the main place where these raw materials are exchanged - seeing that the dubious bets of the Chinese billionaire were going to cost him more and more expensive asked his brokers of the Tsingshan Holding to put more funds of side to cover any losses.
“As if the price of oil went from $100 to $400 in one week”
No wonder that.
This is the traditional procedure in this kind of situation.
But, one of Xiang Guangda's brokers, the China Construction Bank (the second largest commercial bank in China) refused on Monday, March 7, to return to pot.
And not just a little since the LME asked him to pay several hundred million dollars.
It was this refusal or inability to meet the demands of the LME that triggered one of the wildest price spikes in the history of the commodity markets.
The price of nickel quadrupled in three days to reach 100,000 dollars per ton on Wednesday March 9.
Previously, its price had risen in one year from 15,000 dollars per ton to 25,000 dollars per ton at the beginning of March 2022. And this was already considered a significant increase…
"These are extremely rare stock market events. It's a bit like the price of oil going from 100 dollars to 400 dollars in less than a week", underlines Alexandre Baradez.
Faced with this sharp rise, the LME decided to suspend all nickel transactions until further notice.
Nickel was the victim of a particularly explosive mix of ingredients: a violent external shock (the invasion of Ukraine), a major market player tripping over its own stock market bets, and " the arrival of speculators who sought to take advantage of the situation and thus amplified the phenomenon”, summarizes the analyst from IG France.
The song of the "black swan"
This is called a "black swan" event in financial markets.
These are unpredictable incidents that cause prices to fluctuate over a short period of time much more than usual.
"Given the importance of the variations on the nickel market, it is a 'black swan' among the 'black swan'", is surprised on Twitter Mark Thomson, specialist in the raw materials markets.
According to the "black swan" theory, written after the 2008 financial crisis to assess the probability of such events occurring, the incredible jump in nickel prices is as likely to occur "as to gain 1.2 million euros in the lottery with the same ticket more than twenty times in a row", writes the stock exchange site Moneycontrol.
#Nickel's move today was like 30 standard deviations.
One of the most unlikely events ever in financial market history.
A black swan of black swans!
— Mark Thompson (@METhompson72) March 7, 2022
If this event is unique in its scale, it is also in tune with the times, believes Alexandre Baradez.
"It is symptomatic of the Russian risk for the financial markets. It is with this kind of incident that we realize the discrepancy between the real weight of the Russian economy - whose GDP is barely higher than the Spain – and the impact that the slightest shock in Russia can have on the commodity market”, underlines the analyst.
For him, Xiang Guangda will surely not be the only victim of volatility in the financial market.
Whether for wheat, titanium, aluminum or even sunflower, Russia and Ukraine are "attics" for raw materials.
Between the destruction of infrastructure due to the war and the economic sanctions imposed by the international community on Russia, the waltz of prices is not over.
And it's not just a problem of wealthy traders.
"If prices do not come down sharply, this will have consequences on the cost price of companies [forced to pay more for raw materials]. Conclusion: the impact will be passed on to the price charged to consumers", summarizes Alexandre Baradez .
Tesla enthusiasts are not the only ones concerned, since nickel is used to make batteries used in electric ovens or in certain laptop computers.
Not to mention that the strings of electric guitars also contain it.
This may be the final riff.
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