HardAssetsInvestor

Written by HardAssetsInvestor.com  |

June 08, 2007

LME Kneecaps Nickel

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The London Metals Exchange (LME) intervened in the nickel markets again this week. LME announced new rules on Wednesday requiring holders of large nickel positions to lend metal to the market.

The London Metals Exchange (LME) intervened in the nickel markets again this week. LME announced new rules on Wednesday requiring holders of large nickel positions to lend metal to the market.

The rules are intended to increase the supply of metal to the market, which had shrunk as low as one-day (or less). The LME was concerned that traders might buy up the available supply and create a short squeeze, leaving short-sellers unable to find metal to fulfill their obligations, creating a short-term spike in prices as they chase metal wherever they can find it.

Nickel prices have soared recently, up 55% over the past three months alone. Prices topped out at $51,650/tonne in May. But the LME’s move did manage to “calm” the markets, as prices immediately dropped by nearly 5% after the move was announced, and continued to sell-off throughout the week. Traders noted that the spread between nickel delivered today and nickel delivered in three months dropped sharply after the new rules were put in place, suggesting that there was some short-term speculation going on in the markets.

Is that a bad thing? I’m not sure. I go back to what Jim Rogers told HAI about the last LME intervention into the nickel markets, which happened in 2006.

“The more it happens, the more credibility the exchange loses. With the internet and electronic trading, it’s very easy for a new market to develop. And any exchange where that happens frequently will lose its market.”

Ultimately, the answer is to produce more nickel … something that will surely happen as prices of nickel and related mined metals stay high. In the meantime, we’ll see if traders sour on the London market and begin to look elsewhere.