The world’s biggest mining group has called for urgent reform of the nickel market on the London Metal Exchange, saying last year’s chaos shows that a key pricing mechanism is drifting further away from the way the metal is traded.
BHP on Tuesday became the latest industry player to openly criticize the LME nickel contract, which has been dogged by low liquidity since March last year, when prices more than tripled to record highs in three days. The rise came as concerns over Russian supply reversed a huge bet by Tsingshan, the world’s biggest nickel producer and consumer, that prices would fall and led to the exchange controversially canceling trades.
“The global price-finding mechanism for this critical building block of the energy transition is not working well,” BHP said in its annual economic outlook on Tuesday. “The reform of the LME rules for the supply of metals is long overdue. A short episode of LME [last March] pointed out vulnerabilities that had been building up for years.”
The wide flank of the Australian group sounded frustrations widespread by mining groups, traders and consumers who rely on the LME contract to hedge against fluctuating prices for nickel, which is used in stainless steel batteries and electric cars.
The LME benchmark refers specifically to so-called Grade 1 nickel, and the exchange only accepts this high-purity metal for delivery to its warehouses. Acceptance of their product by a trading venue is usually a condition for manufacturers and traders to secure financing from banks.
The contract has long been used as a reference for lower grade forms of nickel, but this has become increasingly problematic as Grade 1 nickel has become a smaller part of the overall market.
In 2010, 57 percent of global nickel production could be supplied LME warehouses, but that number has fallen below 30 percent and will continue to decline, according to BHP. This shift reflects the rapid growth in the supply of intermediate products such as nickel pig iron or matte, which have been developed in response to the needs of the rapidly expanding battery supply chain.
The problems in the nickel market are complicated by the sheer concentration of production and consumption of the battery material in Indonesia and China.
“The underlying tension is that the exchange where the reference price is set is moving further away from what is happening in the physical clearing market – China,” BHP said.
Nickel prices on the LME are trading around $27,200 a tonne, but analysts and traders say the price should be closer to $20,000. Nickel prices shot higher in December on a return to volatile trading patterns.
The spread between the price of lower grade nickel and LME prices has become too wide to reliably benchmark in contracts and trades in some cases.
Market failure makes it difficult to manage price risk for miners, traders and consumers, and could even threaten future supply by making it difficult to assess the economics of new projects and secure funding.
The LME tried to restore trading volumes under the contract, but its efforts to reopen trading in nickel during Asian hours stalled as Britain’s Financial Conduct Authority refused to allow the reopening.
The LME said it recognized “the continued structural shift in the nickel market, driven by dramatic growth in Class 2 production”.
“We are committed to working with the industry to ensure that the LME offering meets the evolving pricing and risk management needs of the industry,” he added.
Despite the turmoil, rival exchanges such as CME Group have been slow to launch an alternative to the LME nickel contract. However, former LME chief executive Martin Abbott, who now runs Global Commodities Holdings, a trading and logistics services company, plans to launch a spot trading platform for Class 1 nickel at the end of March, which could potentially be tied to a rival futures contract on the next exchange .
“We’re going into a market that has a pricing mechanism, albeit one that they have [traders] currently describe as flawed,” Abbott said in an interview. “Now we’re going to find out how wrong they think it is.