#Where is Big Shot, page-151

Tycoon whose bet broke thenickel market walks away a billionaire

While Mr Xiang Guangda may be movingon, the London Metal Exchange is still dealing with the fallout. PHOTO: REUTERS

PUBLISHED

JUL 7, 2022, 9:06 AM SGT

SINGAPORE (BLOOMBERG) --By 2.08pm Shanghai time on March 8, it was clearthat Chinese industrialist Xiang Guangda's giant bet on a fall in nickel priceswas going spectacularly wrong.

Futures had just skyrocketed above US$100,000 a ton and his trade wasmore than US$10 billion underwater. It was threatening not only to bankrupt MrXiang's company, but to trigger a Lehman Brothers-like shock through the entiremetals industry and possibly topple the London Metal Exchange (LME) itself.

But Mr Xiang was calm. Within hours, more than 50 bankers had arrived athis office wanting to hear how he planned to respond to the crisis.

He told them simply: "I'm confident that we will overcomethis."

And he did.

Four months on, the nickel price is falling, as Mr Xiang had predicted.

The coterie of banks led by JPMorgan Chase & Co that were baying forhis blood has been repaid. He has closed out nearly all his short position innickel, making a loss on the trade of about US$1 billion (S$1.4 billion) - amanageable sum given the profits being generated elsewhere in his businessempire, say people who know him.

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Crucially, the man nicknamed "Big Shot" in Chinese commoditiescircles is poised to walk away from the fiasco with his multi-billion dollarmining and steelmaking company, Tsingshan Holding Group, intact and evenexpanding.

But while Mr Xiang moves on, others are left dealing with thedestruction wrought by the crisis. His miraculous escape was thanks in no smallpart to the actions of the LME, which controversially intervened to prevent prices from rising and then suspended trading untilMr Xiang had struck a deal with his banks.

Those on the other side of the trade, who lost billions, were furious. Monthslater, the LME is dealing with a raft of investigations and lawsuits, and thenickel market is still reeling.

"Nice to see that @jpmorgan and The Big Shot got out of this wholething with only scratches," Mr Cliff Asness, founder of AQR Capital Management,said last week in a tweet thick with sarcasm. "It's just heartwarming."

This account of how Mr Xiang extricated himself from a short squeezethat rocked the global metals markets is based on numerous interviews withpeople who were involved, all of whom requested anonymity. Multiple attempts toseek comment from Tsingshan were unsuccessful.

Massive short squeeze

Mr Xiang had built up his massive short position in late 2021 and early2022 partly as a hedge, partly as a bet that a planned jump in Tsingshan'sproduction this year would drag down prices. But when Russia's invasion ofUkraine jolted global markets, nickel started climbing - gradually at first,before rocketing 250 per cent in an epic squeeze.

On the evening of March 8, senior bankers crowded into a room atTsingshan's headquarters demanding answers. Others dialled in for video callsfrom London or Singapore. Of those present, some did not leave until early thenext morning.

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The crowd that night was so large because Mr Xiang's position was spreadacross about 10 banks and brokers - he had been a good client for many of them,including JPMorgan, for years. But after nickel started spiking on March 7,Tsingshan struggled to meet its margin calls. Now he owed each of them hundredsof millions of dollars.

The LME had eventually intervened to halt trading a couple of hoursafter nickel hit US$100,000. It also cancelled billions of dollars oftransactions, bringing the price back to US$48,078, where it closed theprevious day, in what amounted to a lifeline for Mr Xiang and Tsingshan.

To reopen the market, the LME proposed a solution: Mr Xiang shouldstrike a deal with holders of long positions to close out his trade. But aprice of around US$50,000 would be more than twice the level at which he hadentered his short position, and would mean accepting billions of dollars inlosses.

Mr Xiang, who is in his early 60s, stood firm. From a start makingframes for car doors and windows in Wenzhou, eastern China, he had builtTsingshan into the world's largest nickel and stainless steel producer, with anempire stretching from mines in remote Indonesian islands to steel mills onChina's east coast. Along the way, he had acquired a reputation for visionarythinking and a taste for betting big.

The spike in prices and the trading freeze caused havoc for companiesthat use nickel, like stainless steel mills and makers of batteries forelectric vehicles. Some simply stopped taking new orders. On the LME, dealerswere left frantically trying to recoup missed margin calls from clients whocould not pay, and at least one had to seek financial support from its parentcompany.

Yet with unprecedented chaos rippling through the industry, Mr Xiang -still facing his bankers in the early hours of March 9 - had a key advantage.They were more terrified than he was.

If he refused to pay, they would have to chase him in courts inIndonesia and China. What is more, he had executed his nickel trade through avariety of corporate entities - such as the Hong Kong branch of battery unitRuipu Energy - and it was not clear the banks would even have the right toseize Tsingshan's most valuable assets.

JPMorgan, which had the biggest exposure, took the lead. The groupincluded some international players like Standard Chartered Bank and BNPParibas, but many were Chinese and Singaporean banks that had little experiencehandling a situation like this.

Personal guarantee

Mr Xiang told the assembled bankers he had no intention of closing theposition anywhere near US$50,000. A few hours later he was delivering the samemessage to LME chief executive Matthew Chamberlain.

Tsingshan was a strong company, he said, and it had the support of theChinese government. There would be no backing down.

Instead, he wrote a list of the assets he was willing to put up ascollateral: a string of ferronickel plants in Indonesia.

But for some of the bankers, that was not enough. They would not beable to do any due diligence on the Indonesian assets for weeks or months, andeven those who worked closely with Tsingshan had not seen the facilities foryears because of the Covid-19 pandemic.

So Mr Xiang made a further concession that was both valuable and, inChinese business culture, humbling: a personal guarantee.

If Tsingshan did not pay its debts, the bankers could turf him outof his home. That was what he was willing to offer. Take it or leave it.

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It was not much of a choice. On March 14, a week after the chaos thatengulfed the nickel market, Tsingshan announced a deal with its banks underwhich they agreed not to pursue the company for the billions it owed for aperiod of time.

In exchange, Mr Xiang agreed a series of price levels at which he wouldreduce his nickel position once prices dropped below about US$30,000.

When the market reopened two days later, prices moved lower, easing thestrain on Mr Xiang and the banks. A brief dip below US$30,000 allowed Tsingshanto cover about 20 per cent of its short position.

The pressure on the LME was only intensifying, however. The exchange'sregulators launched reviews of its governance and oversight and many hedgefunds were still furious at the LME's decision to cancel trades.

Open interest across the exchange's six main metals slid to the lowestin more than a decade as traders headed for the exit.

Each month, Tsingshan and its banks reviewed their standstill agreement.After the initial dip, nickel spent long stretches in limbo, with priceshovering around US$33,000.

It was a nervous time.

Tsingshan still had a vast short position, meaning it and its bankscould still be exposed to large losses if prices started rising again - forexample, if sanctions against Russia led to an actual disruption in nickelsupplies, which so far they had not.

Finally, in May, prices tumbled decisively below the key US$30,000 levelafter China's lockdowns dented metals market sentiment.

Over the following weeks, Tsingshan reduced its position - which inearly March had been more than 150,000 tons - to just 60,000 tons.

By this point, prices were below the level at which Tsingshan hadstopped being able to pay its margin calls in early March, which meant Mr Xiangno longer owed the banks any money.

By the end of June Mr Xiang had exited his position entirely withJPMorgan and several other banks, leaving him with a remaining short of lessthan 20,000 tons.

People familiar with the matter estimate Tsingshan's losses on the tradeat around US$1 billion. Mr Xiang is not concerned. The loss has been roughlyoffset by the profits of his nickel operations over the same period. Thestandstill agreement, which Mr Xiang extended from the initial three months, isset to expire in mid-July.

Now "Big Shot" is moving on with his life, focusing on plansfor the future at Tsingshan, which had revenues of US$56 billion last year.

His ability to trade on the LME may be reduced, for now at least, but heis still able to trade on the Shanghai Futures Exchange.

He has ambitions to expand, not only in Asia, but also to Africa.

And Tsingshan is as powerful as ever in the nickel market: A massiveincrease in production from his plants in Indonesia is one of the key factorsdriving prices lower, much as Mr Xiang predicted.

But while Mr Xiang may be moving on, the LME is still dealing with thefallout.

Regulators have pointed to the chaos in nickel as a sign of the riskslurking in commodity markets, and called for greater oversight of the entiresector. Hedge fund Elliot Investment Management and trading firm Jane Streethave launched legal action against the LME, seeking nearly US$500 million.

And the nickel market is still broken, say people involved in it, withboth open interest and trading volumes stuck at sharply lower levels as tradersstep away from using LME prices in their contracts.

Mr Jim Lennon, a veteran nickel market-watcher and managing director ofRed Door Research, estimates that less than 25 per cent of global nickel outputis now being sold on the basis of LME prices, down from 50 per cent before thecrisis in March.

"A lot of the industry now has temporarily disengaged from theLME," he said. "The market is still functioning, but it'sstruggling."