A sign for the London Metal Exchange (LME) on a wall by the new Ring, the open trading floor of the LME following its relocation in central London, on Feb. 18, 2016. Leon Neal/AFP via Getty Images
The London Metal Exchange (LME) on March 17 revealed that the bags of nickel stored in its licensed warehouse contained stones. The LME is supposedly the most trusted and secure minerals trading platform; however, it has had its share of trouble with nickel.
The LME announced that nine nickel shipments found in one of its licensed warehouses did not meet the standards, so the warrants were invalidated, and deliveries could not be made under their contract.
According to The Wall Street Journal, the warehouse is located in Rotterdam, Netherlands, and is owned by local logistics company Access World Group. The two-ton bags did not contain nickel; instead, it was stones.
Bloomberg revealed that JPMorgan Chase owned the nickel contracts and that the bank had purchased them several years ago when the goods were already in the Access World Group’s Rotterdam warehouse.
It is unclear whether the bags came without nickel or were stolen afterward. Access World Group had not responded to The Epoch Times’ request for comment by press time, while JPMorgan Chase said it had the warrants and all the necessary certifications at the time of purchase.
The bags were supposed to contain 54 tons of nickel, which is about $1.3 million at current market value. The direct impact on the metals market is limited. However, it has dealt a significant blow to the reputation of the LME.
The LME is the world’s largest industrial metals trading center. The global metals industry trades futures and options through the LME to hedge against adverse price fluctuations. The LME’s website states that it usually trades more than 40 times the world’s metal output. With a history of 146 years, the LME’s positions are regarded as the highest standard in the world and are considered close to cash equivalents. As a result, LME contracts have always been regarded as the safest.
LME does not own or operate warehouses. It only authorizes other companies to store metals on behalf of warrant holders and to issue warrants through agents for deliveries. In other words, the LSE simply transfers ownership of the warrants digitally and must rely on the warehousing companies to ensure the market’s integrity.
Following the nickel scam, the LME requested all licensed warehouse operators to weigh the metal before it was warehoused, and it required reinspection of the nickel already warehoused. The LME pushed back the Asian trading session for nickel contracts by one week from March 20 to 27.
This incident follows a fake nickel incident that occurred last month. On Feb. 9, Trafigura Group, a French metals trading giant based in Singapore, issued a statement saying it had discovered systematic fraud in its purchased containers of nickel. They were inspected and found to contain no nickel at all. Trafigura estimated a maximum loss of potentially $577 million.
Those back-to-back incidents involved theft and substitution. However, Trafigura stated there appears to be no connection between the two events.
The Nickel Shorting War
There are 14 types of metals traded on the LME, but only nickel faces trouble. Last year, the LME had a “demon nickel” incident, and the nickel shorting war is ongoing.
In early March last year, the LME’s nickel futures contracts were abnormally volatile, and within three working days, nickel prices soared from less than $30,000 per ton to more than $100,000 per ton, sending shockwaves through the market.
The London Metal Exchange suspended nickel trading because of the Tsingshan (THG) nickel incident, the first time since 1985 that the LME has suspended trading in metal, in London, on March 8, 2022. The graph shows the one-day rise and fall of nickel prices on the London Stock Exchange. Ben Stansall/AFP/Getty Images
At that time, China’s Tsingshan Holding Group, one of the world’s top 500 companies, was holding a large short position, rumored to be nearly 200,000 tons. Tsingshan either had to close its position with cash or take deliveries soon. However, the nickel produced by Tsingshan was not the high-purity electrolytic nickel required by the LME. So Tsingshan may have paid $8 billion in cash to close out its position.
At a time of crisis for Tsingshan, on March 8 last year, the LME broke a 100-year record by halting nickel futures trading and, a few hours later, canceled all nickel contracts traded in London. This rare move by the LME drove down the prices of various commodity futures.
The LME urgently adopted a series of emergency measures and reopened nickel trading on March 16. After the reopening, the bulls started to withdraw their capital, and the price of nickel fell for four consecutive days. In that process, a large number of traders were trapped.
The suspension of trading on the LME eased the crisis for Tsingshan. However, the suspension caused the market to lose its benchmark, bringing the physical industry chain to a near standstill. At the same time, the LME incurred a series of claims against it. For example, the U.S. hedge fund, Elliott Management, argued that the LME’s decision to cancel nickel trading on March 8 last year was illegal and filed a claim in June. This claim alone amounted to $456 million.
Those nickel incidents shattered the LME’s century-old reputation. In terms of the LME’s background, many people may be unaware that although the LME was founded in the United Kingdom, it was acquired by the Hong Kong Stock Exchange (HKEX) in 2012 for a whopping £1.388 billion (about $1.7 billion). The HKEX’s largest shareholder is the government of Hong Kong, which is under communist China. This means that the real boss behind the LME is the Chinese Communist Party.
Reporter Ellen Wan contributed to this article.
Shawn Lin
Author
Shawn Lin is a Chinese expatriate living in New Zealand. He has contributed to The Epoch Times since 2009, with a focus on China-related topics.
