Nickel volatility plagues London metal exchange

Yahoo Finance's Jared Blikre breaks down the events leading up to the London metal exchange halting nickel trading.

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- A little bit of chaos, to put it lightly over, at the London Metals Exchange after the three month nickel contract fell 8% this morning. That hit a new trading limit, apparently, as there's a lot of heavy selling going on in metals markets. And the price action that you're seeing there is only just a peak, really, into the volatility that we've been seeing in nickel over the past few weeks.

For more on this, let's bring in Yahoo Finance's Jared Blikre, who's been watching the commodities space very closely. And Jared, this has been such a volatile event that it's actually calling into question the validity of the LME itself. But just give us a big step back and explain exactly what's going on in the space here.

JARED BLIKRE: It was a perfect storm. So you have a large nickel conglomerate tycoon over in China who had a multibillion dollar enterprise, one of the largest producers in the world. Now, he produces nickel that's actually pig iron. It's not deliverable to the LME. But he was ramping up his bets that there is going to be a huge increase in supply due to his efforts alone, and that would kind of crimp the market.

So as he was producing more nickel, he was actually betting that the high prices that he was seeing when we had this huge commodity surge last year, that that was going to come down. So he was slowly building a short position over time, betting that prices would go lower. And then you had other industry participants who didn't believe that he could get his capacity up that high, who thought that the EV plays were going to take all that nickel off the market and there was going to be a supply crunch.

So those two forces were already at work. Then, boom, Russia invades Ukraine. Russia is the largest exporter of refined nickel that can be deliverable to the LME. Third largest producer in the world. So a perfect storm envelops. And you had last Monday, you had a perfect storm that created prices going up to 40,000. So nickel had traded in a range from, let's say, 20,000 to 30,000 for a period of time. Suddenly, it went up to 40,000.

Next morning, in electronic trading, things start to go awry. And before the market even opens for pit trading, they had to close it. And they actually busted all those trades, all those early trades, back to midnight Monday. And that's what a lot of market participants are screaming about. I think that you have to take into consideration that there are a lot of forces here that we don't even understand.

- Jared, this is a really fascinating story. And for those that might not be aware of the full details of all of this, a lot of people who are in the LME trading pits are extremely upset because of some of the events that you mentioned, which included the LME actually canceling a large batch of orders that had already been placed-- I believe that was last week-- because of the volatility. So how much of the action that we're seeing today with some of these bets from some of these nickel producers in some cases are actually the result of them trying to close a trade that they had attempted to execute earlier? And then what does this say overall about the credibility of the exchange itself?

JARED BLIKRE: Yeah. Really great observations. To answer your lesson question first, the credibility of the exchange is severely damaged right now. What we're seeing-- now, this is only the last few days of price action in nickel. And by the way, this isn't the nickel contract that trades on the LME. This is the S&P Goldman Sachs commodity nickel index that we're looking at here. But this flat line up here, because there were no trades executed, that's why you're seeing this kind of bizarre chart.

But people have been working through behind the scenes over the last two weeks roughly to kind of sort this out and to cancel, kind of offset those positions. But it speaks as to a lack of market integrity because a lot of traders who are frustrated, including Goldman Sachs, who was poised to make a lot of money on this trade, are now facing potential losses, or at least not the profits that they were expecting from those busted trades.

So a lot of bad blood in this. Some traders are expecting that the LME may go away. The LME has dealt with this before. So we've had the Hunts brother crisis in the 1980s. We had a tin market crisis in the 1980s as well. So we'll have to see if the LME can bounce back for this. But a lot of egg on their face right now.

- Yeah. A very good reminder that in addition to it takes two to tango, it also takes a floor to tangle on. So the exchange is very much an important aspect here. Yahoo Finance's Jared Blikre, thanks so much.