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The Nickel trade – A Chinese billionaire and a big short trade

Hello👋 This week, we covered the Market snapshot, how one trade by a Chinese Billionaire led to a ~230% increase in global nickel prices within just 2 days- which led to trade suspension because of margin calls, followed by what else is trending in markets & curated reads.

1. Market snapshot

The overall market, after suffering for weeks, was up by 2.5% last week. In line with markets, All the sectors saw an uptick this time except Power & utilities. IT & Telecom was the top gainer this week. 

After a long period of underperformance Pharma & healthcare was also the top performer & gained 5%. This can be possibly due to defensive buying & experts are saying that the rationale of this buying can be the inflationary global environment as pharma comes under a non-discretionary spending category. 

If we look at the company level in the pharma sector- Cipla & Sunpharma are the top gainers which are backed by Scale-up in the inhaler market by Cipla & specialty biz in Sun pharma. Dr. Reddy’s has underperformed due to its exposure to Russia & Ukraine. 

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2. The Nickel trade – A Chinese billionaire and a big short trade🤐

What happened – in brief

A Chinese tycoon who owns the largest Nickel mining company placed a big shorting bet on the commodity. He shorted huge volumes of Nickel expecting the price to fall. But they didn’t. Instead, Nickel prices rose from $30,000 to $100,000 per tonne – a 230% increase, all in a couple of days. Leading to losses of $8 BN. The tycoon is known to have a big ego and told his banks and brokers that he doesn’t intend to reduce his position. Given the high leverage, this had the potential to blow up the counterparty bankers’ and brokers’ accounts, taking the exchange down with it. So the exchange played dirty and cancelled contracts between willing counter-parties to bring prices to a level where the trade could be closed. Trading in Nickel is yet to resume.

More details, please!

Okay, let’s understand in more detail. 

Nickel is a pretty useful metal. It doesn’t corrode easily and is used in making non-corrosive materials such as stainless steel, lithium-ion batteries, etc. The metal is always in high demand. Nickel is mined and refined across 25 countries, however, the top 5 countries account for more than 60% of the world’s mine reserve as well as production, and Russia controls 15-17%. With that supply going out of the system, one would assume prices were to rise.

But someone expected it to fall. Xiang Guangda (known as the “Big shot”) who owns the Tsingshan Group, the largest nickel mining group in China had placed huge short bets on London Metal Exchange (LME), expecting the nickel prices would fall <We wonder why he held that view!>

This bet went horribly wrong when the market sensed the short position and nickel prices skyrocketed by 230% in just 2 days!😱 

The Short squeeze and damage control by brokers and exchanges 💁🏻‍♀️

The process of covering a big short position needs someone to buy equivalent long positions. This created a short squeeze and a spike of 3x  in Nickel prices- to  $100,000/ton. The squeeze in turn led to a notional loss of over $8 billion!

Mr. Guanga clearly was in no position to take this loss and said he wouldn’t close his short position as he believed the price will drop “eventually”. But this squeeze was triggered by the two dreaded words in trading – “Margin call”

If you owe the brokers $8 Million that’s your problem. If you owe the brokers $8 Billion, that’s the Broker’s and exchange’s problem!!

So the brokers (JP Morgan and China Construction Bank) and the LME exchange decided to intervene to prevent a blow-up. They rolled back all contracts and cancelled trades worth $4BN to bring the price down before closing further trades in Nickel. This has offended many multi-billion Hedge Fund managers such as Clifford Asness who were denied big gains from the short squeeze.

The London Metal Exchange did wrong and the implications – loss of trust

The current Nickel debacle should never have happened. Allowing a market counterparty to build a 190,000 short position in the most volatile and one of the least liquid metals without anticipating the risk to market orderliness was neglect of responsibility. Worse was the decision to cancel Nickel trades between willing buyers and sellers. That’s the boundary an exchange should not cross.

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3. What else is trendin’?🤙🏻

✔️ Natco Pharma’s partner Teva launched Revmilid (used to treat cancer, bone marrow) in the range of mg, 10mg, 15mg, and 25mg, in the U.S. Teva also has the exclusivity for all these strengths till Jan’2026. 

This is very positive for the company as Revmilid’s annual U.S. total sales were $8.6 billion & and Natco has the exclusivity for the next ~6 months🤩after which i.e. in H2FY23, Dr. Reddy’s will be launching the same product. 

✔️ Turnaround in bank credit↪️: In Feb, banks have reported robust pick up in credit after a lag. Crisil expects the bank credit growth to be ~10% in FY22 compared to ~5% in FY21 & GNPA’s (Gross nonperforming assets) to decline to ~5.8%-6.3% in FY22.  

This growth will be majorly driven by corporate credit trajectory, finally after a period of subdued growth😌

✔️ Wheat to cover up for high oil imports? 🤟Indian wheat players have signed contracts to export ~5,00,000 tonnes of wheat (total ~7,00,000 tonnes set to export) as India is serving as an alternative supplier during the war to the world.  

A blend of high inventories and high international prices is something that will help wheat players to make a fortune this year✨ 

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4. Podcast of the week

Watch the latest episode of our podcast “Breaking investment stereotypes” which consists of many learnings and nuggets of wisdom with Sankaran Naren- CIO & Executive Director at ICICI Prudential AMC. 

Here he discussed: How to value invest, How to be early in markets, views on sectors like Metals, Real estate, Banking, etc. He also explained why he is bullish on the Insurance sector in India.  To watch the full video, click here.  

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5. Good reads 📚

5.1  A write-up on a Few basic questions by Anand Sridharan.

5.2 Presentation called “What are we seeing” by Abakkus asset management. 

5.3 A thread on what is the current London Market exchange situation & why it should affect people in markets. 

5.4 Summary pointers of a podcast by Intrinsic investing on Stagflation panic grips stock market. 

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See you next week. Until then, happy investing!

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