Published: August 16 2006 21:40 | Last updated: August 16 2006 21:40
The London Metal Exchange, the world’s biggest base metals exchange, was forced to make an extraordinary intervention in the nickel market on Wednesday to head off the risk of defaults on trades by speculators as the metal soared to a record high.
The three-month nickel price surged to its biggest one-day rise since January 2004, leaping 6.4 per cent to a record $29,200 (£15,300) a tonne amid what one analyst called “panic” covering of short positions, where traders bet on a fall in the metal’s price.
Dealers believe the metal could now breach $30,000 a tonne, because global inventories of nickel have shrunk to less than one day’s worth of world consumption. The cash price of nickel soared 14.2 per cent to $33,350 a tonne a on Wednesday.
Although London Metal Exchange nickel inventories rose 354 tonnes to 6,162 tonnes, the amount of metal actually available to the market is just 1,374 tonnes, since a large proportion of the stockpile is earmarked for delivery. That compares with annual production of about 1m tonnes.
The LME said that to preserve orderly trade, it would permit traders with “short” positions, betting on price falls, to defer settlement of their trades.
Given the tightness of supplies, the exchange also offered some leeway to traders with a short position. It said that from Friday, anyone with a short position who was unable to make physical delivery could postpone delivery at a cost of $300 a tonne per day – equivalent to about 1 per cent of current market prices.
The LME imposed a limit in the spread between nickel cash and futures prices of $300 per tonne per day. It also suspended rules that require some traders with big long positions – those betting on rising prices – to lend metal to short-sellers who need to settle trades.
Simon Heale, chief executive of the LME, said: “Nickel stocks are at historically low levels and we now have a genuine material shortage. Our first priority is to ensure that trading remains orderly and to prevent the risk of settlement defaults.”
Robin Bahr of UBS said there was “extreme tightness” in the nickel market that suggested “shorts have become trapped and are desperately trying to cover their positions”. Nickel prices have doubled this year.
Copyright The Financial Times Limited 2006
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