Nice post. Here’s my 2c:
On LME Ni in General:
I wouldn’t call Ni a “problem child”. It's worth bearing in mind that the LME has served industry very well over the decades. I don't see there being much of a problem in continuing to use LME-spec Ni as the benchmark for pricing the myriad of intermediate products.
There is an argument of sorts to be made for an exchange (most likely the SHFE, for obvious reasons) possibly offering a NPI futures contract to permit hedging of that particular intermediate product, due of the v.large degree in which NPI features in the modern s/steel production process.
On TS/BS’s ‘Imperfect’ LME ‘Hedge’:
Wrt the dominant NPI producer, TS/BS, using the LME to conduct his 'imperfect hedge' for his undeliverable NPI (I contend it was a punt, not a hedge – see below), one might ask why he didn't do this on the SHFE? Still just as imperfect a hedge insofar as his NPI would still be incapable of delivery (like the LME, SHFE also accepts 99.8% pure Ni for delivery), but doing so on the SHFE would have been on a major exchange domiciled in the country/market that all of his NPI goes to.
Furthermore, why would such a dominant lost-cost producer in the space feel the need to materially ‘hedge’ at all? Remembering that a hedge is a mechanism to protect one against financial loss, if one doesn’t need to worry about their sales price dropping below their COP, then any attempt to lock-in perceived high prices at a point in time ceases to be a hedge and begins to look more like a form of punting (i.e. picking a market top).
Many contemporary players in other parts of the resources industry who are also at the lower end of the cost curve don’t feel the need to hedge… because they (rightly) don’t need to.
(Just some comments to mull over.)
On PLS:
I understand it, PLS developed their own marketing platform because the Li industry does not yet have a central market that discovers price via natural supply/demand forces on a daily basis (i.e. no daily market-driven benchmarking mechanism to derive floating market-driven pricing of their intermediate product). Kinda like iron ore (IO) prior to the creation of futures trading as recently as the late-2000s. (Think about how many decades IO didn't have an international daily spot market.) In PLS's case, it strikes me as a classic case of necessity being the mother of invention, but a solution that is tailored specifically to PLS, by PLS, which you eloquently alluded to.
In short: No need for POS to reinvent the wheel wrt pricing of our future Ni concentrate.
On LME Short Squeeze 2.0™:
The wild price fluctuations this week are interesting, but not entirely surprising. They are not exclusive to the LME, though. SHFE is on a tear too. Yes, there’s likely to be a fair degree of short-covering at SHFE too.
When looking at the events of the past 2-3 weeks in the LME in isolation, I understand how this week’s price action might look rather dodgy. However, I take this view: the wild ride up (prior to LME suspension) and down (limit-down between last Wed and this Mon whilst LME was ‘discovering’ price) was the direct result of the LME not already having in place daily price movement circuit-breakers. An basic governance and market oversight fail by LME, which did not feature on the SHFE. This week’s price action is driven much more by what would normally happen when an exchange (LME) has those basic circuit-breakers in place, as evidenced by the near-lockstep price action (strongly upwards) by both exchanges.
Sure, there’s a great deal of financialisation of commodities markets that increases their volatility – esp. if a market operator (LME) is missing important oversight management tools. However, I view all this primarily through the prism of a tinderbox of very low visible physical supply being lit by a black swan event (Putin’s Own Goal™) and amplified by the financialisation aspects (naked short-covering).
At the end of the day the fundamentals are still extremely tight, imo. Many players, not just the financial shorts, have been caught napping and will begin to realise that they don’t have much choice, other than to pay the piper (miners). We know that society managed to live with the large price moves in IO since daily price discovery became a thing. It will need to do the same for Ni. Once it eventually dawns on the market that these higher prices aren't fleeting there will be a wholesale re-rate of miners. The only real question is that of price. It's a bit too early to tell, while the volatility is like this.
It’s looking very much like Robert Friedland’s brilliant “Revenge of the Miners” quote has begun, with a sonic boom.
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