The industrial chain of "Devil Nickel" in Castle Peak War is very hurt.

Aoyama Holdings, the world's largest producer of ferronickel and stainless steel, which has always kept a low profile, has encountered an "epic" incident and is still in the game.

In the early morning of March 15, Beijing time, Castle Peak Group announced that it had reached a silent agreement with a syndicate of futures bank creditors. During the quiet period, Castle Peak and syndicate will actively negotiate the implementation of standby, guaranteed liquidity credit, mainly for Castle Peak's nickel position margin and settlement requirements. During the quiet period, the participating futures banks agreed not to liquidate positions in Castle Peak or to increase margin on existing positions. With the elimination of abnormal market conditions, Qingshan Group should reduce its existing positions in a reasonable and orderly manner.

The best part of "forcing the short" came at noon on March 8, Beijing time, when nickel prices fluctuated sharply enough to keep traders awake all night, even though it was still in the early hours of the morning in London. In just an hour, the London Metal Exchange (hereinafter referred to as "LME") witnessed an explosive rise in the price of nickel. Just 35 minutes after the nickel price was at $65000 a tonne at 05:33 local time, it surged to an all-time high of $100000 a tonne. Although it later fell back to $80, 000 a tonne, it was still up 168 per cent from $29800 on March 4.

In the past, the price of nickel usually fluctuated by a few percent every day, and the price was stable at 10, 000 to 20, 000 US dollars per ton. An unprecedented surge has forced institutions to adjust. After 8 a.m., LME announced an emergency suspension of nickel trading and introduced a series of emergency measures. Shortly after noon, LME said it had decided to cancel all transactions for the day in order to maintain market stability.

On March 15th, LME announced that it would reopen the nickel market at 8am local time on March 16th. In view of the previous abnormal fluctuations, LME specifically set a limit for all base metals in its announcement: the daily maximum rise and fall of other base metals contracts will be 15 per cent plus or minus 15 per cent of the closing price of the previous trading day, while the temporary price fluctuation limit for nickel is 5 per cent. LME also postponed the delivery of all nickel contracts signed before Wednesday March 16 to March 23.

It is still up in the air whether the Aoyama management's efforts to defuse the crisis will bear fruit in the end.

Is it hedging or speculation?

Nickel is a kind of silver metal, the stainless steel products produced with it as raw materials are widely used in daily life, and it is also one of the important raw materials of power batteries. For nickel producers, in order to avoid or reduce the loss of adverse price changes, using futures trading temporarily instead of physical trading to do "hedging" is a common operation to guard against risks.

Founded in Wenzhou in 1988, Qingshan Group is the world's largest integrated industry ranging from laterite nickel ore to nickel iron and stainless steel. 1/3 of Aoyama's stainless steel production capacity is built in Indonesia, which has the largest nickel reserves in the world. According to open source securities data, Indonesia produced as much as 1 million tons in 2021, accounting for 37.04% of the world, making it the world's largest nickel producer.

With the annual growth of the market share of new energy vehicles, the demand for nickel has gradually increased. From the beginning of 2016 to before this round of rise, the price of nickel has risen from about $8000 / ton to about $20000 / ton. However, as a producer of nickel, Castle Peak has a demand for hedging. Shorting nickel means bearish on the price of nickel. Before the conflict between Russia and Ukraine, several research institutions thought that the supply of nickel would exceed the demand in 2022, and the price of nickel would fall. According to the estimates of Guojin Securities at the end of 2021, the overall global nickel supply is in surplus from 2021 to 2025. With the concentrated production of Indonesian ferronickel, hydrometallurgy and pyrometallurgical high nickel projects from 2022 to 2023, the oversupply of 2022 and 2023 is expected to be 290000 tons and 320000 tons respectively.

It is reported that Castle Peak plans to produce 850000 tonnes of nickel in 2022, up 40 per cent from nearly 600000 tonnes in 2021. Aoyama controller Xiang Guangda believes that so much nickel entering the market will lead to a drop in nickel prices. Aoyama did have this market impact. In March 2021, Aoyama Holdings announced the successful trial production of its high matte production line. The news triggered a market oversupply and sharp fluctuations in domestic and foreign nickel futures markets. Lunni fell 14% that month.

However, on the supply and demand side, global nickel inventories continued to decline, breaking a two-year low of 74778 tonnes at LME as of March 9. Wang Cong, chief analyst of Shanghai Nonferrous Nickel, told China Newsweek that LME nickel inventory has dropped from more than 200,000 tons last year to less than 100000 tons this year, and the problem of insufficient deliverables has surfaced. In this context, taking a large number of short positions is itself a very dangerous thing, and there may be some misjudgments in the hedging strategy.

Yang Han, PhD in economics from Shanghai University of Finance and Economics, writes that there are two main motivations for Castle Peak to short nickel. "one is that Castle Peak needs to short futures to hedge spot risk." Aoyama has acquired the mining right of 47000 hectares of laterite nickel mine in Indonesia, and Aoyama has a large amount of nickel in stock, so Qingshan's short order in LME, such as the drop in nickel price and the profit of the empty bill, will be able to hedge against the risk of spot depreciation. Second, based on the previous analysis of the supply and demand situation of nickel, from the observation of position, Castle Peak's 200000 tons of nickel obviously exceeded the need for hedging, but Castle Peak may be based on its understanding of its own prospects for increasing nickel production, and it is expected that after a substantial increase in the supply of high matte nickel, nickel prices will decline, so shorting nickel is Castle Peak's' market judgment'. "

The seemingly reasonable motive for shorting encountered the Black Swan incident. After the conflict between Russia and Ukraine, the price of nickel rose rapidly. Russia is the world's third largest nickel producer and the largest exporter of refined nickel. LME requires that nickel deliverables have a nickel content of not less than 99.8%, and refined nickel is its deliverable type. Anxin Securities believes that in the case of low nickel inventory and will continue to decline, Russian nickel spot liquidity risk leads to increased risk of LME run.

"Aoyama carries out high short selling in the futures market in order to lock in relatively high returns, which belongs to the normal hedging operation of enterprises, and there is nothing wrong in essence." The head of the futures department of Jinchuan Group pointed out to China Newsweek that it needs to pay attention to whether its futures position matches the actual production plan. Wang Cong believes that the risk point of the Castle Peak hedging strategy is that the nickel products it produces do not meet the LME delivery standard; on the other hand, the short positions in Castle Peak are too concentrated.

Futures are traded on margin, that is, you only need to pay a certain percentage (for example, 10%) of the margin to trade the contract, which is magnified by 10 times the leverage, but when the price of the contract increases by 10%, the margin will be lost. Generally speaking, there are two ways to deal with it, the first is to make a margin call, and the second is to complete the delivery as a short position, that is, to hand over the goods to the bulls at the price on the delivery date of the futures market contract.

It is rumored that Castle Peak has a short position of about 200000 tons, which is too large compared to its estimated annual production of 850000 tons, according to industry insiders who spoke on condition of anonymity whether it was for hedging or speculative purposes. The above-mentioned industry insiders believe that unlike copper, aluminum, zinc and other varieties, the spot market and futures market of nickel are relatively small, the market information is not too transparent, and the industry leader has obvious information advantages. Aoyama has manipulated market prices many times in 2018, 2019 and 2021 to make a profit in the futures market. For example, in 2019, Aoyama made a large number of Torun nickel contracts around 12000 US dollars / ton, and with the news of Indonesia's early mining ban, the price of nickel rose all the way to nearly 19000 US dollars.

"the high nickel matte produced by Aoyama contains about 75 per cent nickel, which does not meet the delivery standards. The electrolytic nickel production capacity that could have been used for LME delivery is 900000 tons, while Russian nickel production capacity is 200000 tons, accounting for 22 per cent. After Russian nickel was banned from delivery this time, Aoyama's counterparty acquired deliverable nickel spot on the market at the same time, resulting in a shortage of spot inventory. " Yang Han wrote to explain that bullish counterparties have gathered a large amount of money at the same time, constantly driving up nickel prices in the futures market, "the aim is to make Aoyama continue to lose a lot of margin, at the same time can not find spot delivery and was forced to close the position."

Why lose halberd "overseas market"?

"in addition to the imbalance between supply and demand of nickel, mistakes in the Castle Peak strategy and the conflict between Russia and Ukraine, the poor supervision of LME is also an important reason for this incident." A futures industry practitioner believes that LME's strong intervention and cancellation of all trading results on the 8th is largely a "self-help" act.

LME was founded in 1876. Its base metal futures and options contracts account for 80% of global base metal futures trading. It is the largest non-ferrous metals exchange in the world and controls the pricing power of global non-ferrous metals. In June 2012, under the leadership of Li Xiaojia, then chief executive of HKEx, HKEx bought LME for HK $16.7 billion.

Li Xiaojia revealed in a recent interview that after HKEx spent US $2 billion to buy LME, it spent nearly US $300m to set up a LME clearinghouse, and this time it was precisely the clearing house that launched the corresponding mechanism to cancel the transaction. He believes that HKEx had already made a clear follow-up plan when it bought the LME exchange, that is, to set up a clearing house and let all members assign clearing operations to LME, ensuring that LME has the ability to cope with significant market fluctuations. "without clearing, the exchange will not have the 'teeth' to control the market. The exchange is only responsible for making deals, not controlling the position and whether or not to close the position. Only the clearing house can take care of these matters."

Xiao Cheng, a practitioner in the futures industry, told China Newsweek that from its history, LME has experienced the process of the spot market, the forward wholesale market and the futures market, and initially did not set a rise or fall limit, which has a certain impact on the sharp rise in nickel prices.

The market has different comments on the above moves. Some fund managers who profited from the rally were unhappy that the intervention of trading institutions undermined the market's system of punishing highly leveraged operators, and some hedge funds withdrew their LME positions.

However, more people are supportive. One futures practitioner, who spoke on condition of anonymity, believes that the rescue of LME revolves around the two basic functions of the futures market-price discovery and hedging. In this Lunni "forced position" crisis, it broke through the $100000 mark on March 8, which has been seriously divorced from the reality of the spot market, causing customers in the upper, middle and lower reaches of the industrial chain to be unable to quote transactions. Some short-sellers may be unable to pay margin and go bankrupt after subsequent price increases, and their basic functions of price discovery and hedging have been threatened.

The above people believe that for a long time, LME market supervision appears to be very weak, compared with other futures exchanges at home and abroad, LME has major deficiencies in risk control systems such as large position reports, monthly delivery limit, rise and fall limit, and forced closing of positions, and the supervision of delivery warehouses is also very soft. Due to the lack of improvement to the system, using the price of LME as the basis for the settlement of annual long orders has been questioned. In the face of various challenges, LME urgently needs to adjust its system.

After the "short" crisis, LME not only suspended nickel trading, but also hoped to "mediate" from it. LME issued notice No. 22 / 057 on March 10, London time, informing all members of the latest developments in the Lenny market, saying that it planned to sterilize long and short positions before reopening nickel trading. However, LME's efforts are not going well. "the Exchange has now analysed the voluntary offset of positions by multiple short positions and believes that this approach is not appropriate at present, given the limited response." LME said in the latest review announcement.

On March 15, LME released the latest regulations, in which the new large position reports and more than 100 OTC reports mean that LME can know and ask questions and position restrictions on large households at any time. Wang Cong believes that this means more regulation and more transparent trading. In addition, LME also added delivery brands to help solve the problem of insufficient deliverables, and will implement the nickel price range from March 16. LME also delayed delivery of all nickel until March 23, which Wang Cong believes makes delivery feasible for short sellers in the short term.

"in overseas markets, domestic traders lack experience, are not familiar with trading rules and regulatory rules, lack geographical and popular advantages, and are prone to 'losses'." Yang Han combed the famous events in the bulk derivatives market in the history of the 20th century. For example, in 2002, AVIC Singapore began to intervene in the derivatives business, and the head of the company who initially tasted the benefits judged that the oil price would gradually fall after 2004. So a large number of oil call options were sold and put options were bought. As a result, the market did not meet expectations, and oil prices rose, resulting in a loss of 5.8 million US dollars. Instead of choosing to stop losses in time, the company made up for its losses by selling more call options with higher execution prices, while delaying put options to expand its exposure. Finally, in November 2004, Goldman Sachs, Barclays and other international investment banks jointly forced positions, brokers also raised margin requirements, the two factors combined, resulting in a loss of $381 million.

In addition to excessive speculation leading to excessive exposure and risk control should be strengthened, Yang Han believes that in the process of going out, we should always pay attention to the information disadvantages and battlefield disadvantages caused to us by overseas markets, "keep our positions, our own inventory and other key business information strictly confidential, avoid being watched by opponents, and become a 'wandering elephant' in the market."

Nickel industry chain blocked

Nickel prices rose sharply in a day, causing LME to suspend trading for the first time in three decades and plunging the industry into chaos.

In response to a reporter's question, the China Nonferrous Metals Industry Association pointed out that the current nickel price has seriously deviated from the fundamentals, lost the guiding significance for spot prices, deviated from the original intention of serving the real economy, and caused serious harm to the global nickel and upstream and downstream related industries, so we should prevent malicious speculation and irrational sharp rise in the price of non-ferrous metal products.

In China, the nickel market has also been affected, with the Shanghai Futures Exchange rising by the daily limit. In order to calm the market, the stock exchange also suspended trading in some nickel contracts for one day. Unlike LME, however, the exchange imposed caps on daily price fluctuations to avoid large fluctuations and raised trading costs for nickel and other commodities.

The sharp rise in nickel price and the crisis of forcing positions may further lead to the predicament of the whole nickel industry chain in the future. On the one hand, for one of the largest enterprises, Castle Peak Group, it means huge cash flow pressure. In addition to the hundreds of millions of dollars in margin urgently needed, Aoyama faces potential losses of billions of dollars in short positions in nickel futures. Although Castle Peak is suffering from an extremely rare crisis, several industry insiders told China Newsweek that this is not a bone-breaking effect. It is reported that Aoyama Holdings had revenue of $19 billion last year, and even if it suffers from short-term cash flow pressure, it is unlikely that the incident will collapse.

At present, the extreme short squeeze may begin to ease, and Aoyama has reached a silent agreement with a syndicate of futures bank creditors. during the quiet period, the participating futures banks agreed not to close their positions in Aoyama. Or ask for an increase in margin for existing positions. On the supply side, Indonesia has also publicly expressed plans to increase production. Indonesia plans to add up to 400000 tons of nickel this year, bringing its total production to 1.4 million tons to ease market pressure, Indonesia's Minister for Investment and Maritime Coordination Luhut Panjaitan said in an interview.

However, Wang Cong believes that it is difficult to predict the rise and fall after the reopening of LME, and the event is still in the process of fermentation. Assuming that LME prices continue to rise, all raw materials settled at LME prices or protected in LME are difficult to accept downstream (there is a high probability of production reduction and shutdown downstream without a sales contract), and it is difficult to sell at a high price after long-end delivery. LME prices from the long-term dimension to see the high probability of downside.

This also makes the nickel industry chain enterprises face varying degrees of difficulties. Due to the sharp rise in nickel prices, there have also been different increases in the prices of other cathode materials, and the cost pressure of downstream manufacturers has risen sharply. Shares of companies associated with Qingshan have plummeted, with Zhejiang Huayou Cobalt Co., Ltd. falling 10% on March 9, while Grimme, China Molybdenum and CNGR New Materials all fell more than 5%.

"the industry has lost its pricing benchmark," said the head of the futures department of Jinchuan Group, which has long been engaged in futures trading in the nickel industry. China is the world's largest consumer of nickel, but it is poor in nickel resources and is more than 90 per cent dependent on raw materials. When importing nickel products and signing annual long orders, China's imported nickel raw materials generally take the LME nickel price as the pricing basis. Now, LME nickel price has lost the function of price benchmark for a short time.

The aforementioned head of the Futures Department of Jinchuan Group believes that the sharp rise and collapse have had a great impact on the spot and futures markets. Spot upstream and downstream enterprises have reduced production and stopped taking orders, and trade has come to a standstill; the futures market LME has been suspended, and the futures market has been continuously up and down, leading to the inability of physical enterprises and trading units to carry out normal transactions, and has also formed obstacles to enterprise hedging.

The nickel downstream power battery industry is also under pressure. Nickel and lithium are recognized as bottlenecks in power batteries. Zou Yiping, senior analyst for battery materials at Ruizide Energy, told China Newsweek that Chinese producers of nickel sulfate for electric vehicle batteries have stopped bidding due to the lack of LME pricing standards, and automakers may consider whether to adopt a high-nickel battery-powered technology model if nickel prices continue to rise.

Many people in the industry said frankly that the disorderly fluctuation of nickel price seriously disturbed the normal order of production and operation of the industrial chain, and it was the wish of all enterprises in the industrial chain to quell it as soon as possible. "at present, the upstream and downstream of the industrial chain are basically in a state of semi-stagnation.

As of press time, China Newsweek could not get a reply from Aoyama Holdings on the interview. "at present, it seems that it is very difficult for Aoyama to survive unscathed and may suffer some losses, but not as much as the $8 billion rumored in the market." Yang Han believes that, on the other hand, if a large number of nickel plates are bought back at the current high price of more than US $50,000 per ton, such a loss is also unbearable by the long counterparty. "Aoyama and the long counterparty are likely to close their positions at the agreed price. The key is the level of the agreement price."

"the futures market is all ineffective, as far as this incident is concerned, whether it is the use of spot advantage to short or the use of capital advantage to do more, the harm is the participants of the entire industry." The person in charge of the Futures Department of Jinchuan Group suggested that the Securities Regulatory Commission, safe, the Central Bank, and the General Administration of Customs can jointly open a channel of free circulation under effective supervision, so that China's powerful enterprises and foreign enterprises can hedge in the channel, instead of using offshore companies to hedge as in the past, enterprises that go out to take prices out, and enterprises that come back to bring prices back, truly fully participate in international competition. Full exchange of prices in order to get the right to speak. At the same time, the paths and regulatory measures for domestic enterprises to participate in overseas futures market hedging should also be discussed.