What in the world is going on with nickel? Answering this question in full would require far more space than a standard IER blog will permit, but I’ll do the best I can.

Let’s start with the headline news: In early March 2022, the nickel price spiked to an all-time record high of more than $100,000 per metric ton. In response, the London Metal Exchange halted trading on March 8 and even canceled some trades that were executed before the pause.

Now the background, beginning with nickel’s place in the global economy: Nickel is a critical mineral for wares including stainless steel and, of particular interest to energy policy, batteries. According to the International Energy Agency, electric vehicles and battery storage will surpass stainless steel as the largest end user of nickel by 2040.

The top nickel-producing countries are Indonesia, the Philippines, and Russia, which together supplied more than 55 percent of the global production total in 2019.

The proximate cause of the March 2022 nickel crisis was the Russian invasion of Ukraine, which augured the exclusion of Russian commodities from global markets. But there’s more at play here. As I covered with the Heritage Foundation’s Anthony Kim last week, Indonesia—the world’s largest nickel producer (about 30 percent of the global total in 2019) and holder of the largest reserves (slightly less than a quarter of the global total in 2019)—has an export ban in place. The official rationale for the policy is that it will entice companies to invest in nickel processing facilities within Indonesia and, thus, help move the archipelagic country up the so-called value chain.

According to Indonesian President Joko Widodo, “If we do not dare to try down-streaming, when will we stop exporting raw materials? Until then, we will only be an exporting country of raw materials, even though if we turn them into finished goods, the added value can be tenfold.” Indonesian Finance Minister Sri Mulyani Indrawati, likewise, commented to the World Economic Forum in January 2022, “We are the biggest economy in ASEAN, and you cannot allow this economy to just depend on commodities without value added.”

In practice, the nickel export ban has woven Indonesia more tightly into China’s Belt and Road Initiative—the behemoth’s strategy for global economic influence.

As Kim and I wrote in our previous article:

(T)he current nickel upheaval shows a flaw in this strategy. Indonesia’s nickel economy, now linked to a handful of Chinese companies, is walled off from potential customers who would, if not for the ban, be bidding against one another for Indonesian nickel. In essence, the government has made Indonesian nickel off-limits to the highest bidder, thereby limiting the resource’s potential to enrich Indonesians…(The export ban) will also render Indonesia geopolitically vulnerable. Dependence on exclusive Belt and Road links, rather than access to the panoply of buyers on an open global market, will weaken Indonesia’s hand as China threatens its territorial sovereignty at sea.

The company that has been most willing to put stakes in the ground in Indonesia has been Tsingshan Holding Groupa firm at the heart of the Belt and Road. Tsingshan anchors $30 billion in investments from Chinese companies to process nickel in Indonesia and operates a leading battery-grade nickel-processing facility at the Indonesia Morowali Industrial Park (IMIP) in Cental Sulawesi Province. To underscore the importance of this nexus, appreciate that Xi Jinping himself attended the IMIP signing ceremony in 2013. In 2018, the CIMB ASEAN Research Institute placed the IMIP alongside projects like Melaka Gateway in Malaysia and the Jakarta-Bandung Railway as cornerstones of the Belt and Road in Southeast Asia.

Tying this together, Indonesia’s export ban on nickel blocks willing global buyers from accessing a key commodity while simultaneously linking Indonesia’s destiny to an economic project emanating from Beijing.

This brings us back to the London Metal Exchange (LME) decision to pause trading and abrogate executed trades. The main beneficiary of the LME decision was none other than Tsingshan Holding Group and its chairman Xiang Guanda. As the Wall Street Journal reported on March 18, Tsingshan was in line to owe $15 billion on account of the price spike after building an extensive short position on nickel last year.

The Journal editorial board took up the discussion on March 22:

Many investors suspect that Mr. Xiang had built a short position with plans to flood the market with his nickel. But then as prices climbed amid Russia’s invasion, his brokers struggled to meet margin calls, and bullish investors took advantage. Nickel prices surged 250% amid the short squeeze before the LME suspended trading and cancelled trades.

The Journal reported that Tsingshan would have owed $15 billion if not for LME’s intervention. Tsingshan could cover its short position by delivering high-quality nickel to the exchange, but this would probably require the Chinese government to swap its high-grade reserves for Tsingshan’s low-grade nickel.

By canceling $4 billion in trades, the LME unfairly penalized opportunistic traders to the advantage of Tsingshan and Beijing. What makes the trade cancelations especially curious is that the LME is owned by the Hong Kong Exchanges and Clearing Ltd., a company based in the eponymous special administrative region under China’s sovereignty.

Cliff Asness, founder of AQR Capital Management, tweeted in response to the trade cancelations and the LME claim that it made the decision to prevent brokers from failing, “LME’s problem. The LME exists to make sure trades that are ACTUALLY DONE are settled. They have a parent company who can and should pay if they failed to control the risk. On that topic, their parent company is an interesting one considering the shorts they grossly favored.”

Dissecting the topic Asness references, the Journal ed. board continues:

Some traders are speculating that LME’s owners at the Hong Kong Exchanges and Clearing Ltd. felt pressure from Beijing, even if not explicit, to do so. LME has blamed a lack of visibility in over-the-counter agreements and described the market moves as unprecedented. LME CEO Matthew Chamberlain denies Chinese pressure and said this week that the exchange intervened “because of the size and the systemic impact of the client and we would have done that whatever their nationality.”

This explanation is hard to credit. Tsingshan may have lost billions of dollars, but it wouldn’t have taken down the nickel market.

At the close of March, nickel markets are still in turmoil. On March 29, Bloomberg’s Mark Burton wrote, “Nickel trading volumes continue to collapse on the London Metal Exchange in the wake of an historic short squeeze, setting up a liquidity crisis in the market for one of the most crucial industrial commodities.” As the Journal ed. board suggests, British regulators ought to take a close look at the LME’s recent actions.

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