In case you missed it, the price of nickel went vertical on 8 March and briefly topped US$100,000 per tonne for the first time ever.
There hasn't been this kind of calamity on commodities exchanges since previous crises for tin, oil and gold back in the 70s and 80s.
The London Metal Exchange (LME) promptly halted trading after prices went parabolic, as brokers struggled to fill orders and collect margin calls from traders being liquidated en masse. Billions were lost from short sellers as the price eventually spiked 250% in around 24 hours.
Afterwards, trading of the metal could only occur within European hours and with a 10% cap on volatility.
Obviously, the conflict in Europe has the market jittery over supply concerns on the industrial metal, that is used in applications ranging from batteries to steel production.
Nickel had already been strong for more than 12 months prior to the conflict. However, Russia is the world's largest supplier of nickel and the events sparked a frenzy on the LME last week.
At the time of writing, Nickel is fetching US$48,226 as things have 'settled' and trading has somewhat returned to normal.
But there's a bit more at play than just the forces of supply and demand in this case. Firstly, it appears to be more market mechanics instead. And second, there wasn't that much of a spread between buyers and sellers in early March anyway.
There was, however, a large amount of short interest on the price of nickel from one particular steel and nickel juggernaut out of China, Xiang Guangda.
Guangda is the owner of Chinese steel and nickel giant Tsingshan Holding Group Co. The company is actually a large buyer of the metal, being the world's largest steel producer, but held a large short position in nickel futures as well.
It's not entirely clear if this was as a hedge against falling nickel prices or if there was some speculation involved, now that some time has passed and more details have emerged on the matter.
Instead, what happened was a classic but rare 'short squeeze' – not unlike that seen in the GameStop Corp. (NYSE: GME) saga in early 2021.
Back then, GameStop shares rose from around US$17 to US$325 per share in less than a month as retail traders squeezed out hedge funds that held large positions on the company.
In other words, we've seen this movie before. But what is a short squeeze? And will it impact ASX shares? Let's take a look.
What is a 'short squeeze'?
Those holding a short position in the futures markets are either protecting against price movements or wagering that prices will fall.
Obviously, those speculators will see their capital evaporate if prices suddenly shoot up, if they aren't hedged themselves.
In a squeeze, rising prices put these speculators in between a rock and a hard place. In order to stay in the trade, they (or their brokers) must buy (or go long) on the asset in a process known as 'covering the short'.
However, if the short interest is high enough, the process forms a negative feedback loop – as prices rise, the huge wager forces the trader to buy more of the asset — pushing prices up even further, and compounding losses on the short side.
The same happened with GameStop stock, albeit in a more architected fashion. This time, however, it was with nickel, a global commodity that is essential to our day-to-day lives.
Not to mention it's requisite in the future of energy production and the likes.
So as prices began to rise, the short seller had to cover his position by buying nickel, sending prices higher. Other speculators joining in may have also helped the rise.
What actually happened?
It was a fairly interesting set of affairs. As the events unfolded on 8 March, many in the industry were talking of an all-out meltdown in nickel markets.
If we backtrack a bit just before the jump, we see that nickel has been in an uptrend with strong support. Despite the gain in price, Tsingshan was able to meet its margin calls at that time, Bloomberg reported.
It wasn't until the enormous surge began on 7 March that LME brokers began to feel nervous and started ringing their clients to post more margin in their accounts. Margin is just a cash balance that futures traders must maintain as they trade on leverage.
Tsingshan got a margin call for $3 billion, according to Bloomberg, meaning it had exposure to more than 150,000 tonnes of nickel.
The problem for Tsingshan was that $3 billion was a little too much for this steel giant's bank account. Plus, no banks were going to answer their calls to lend that amount on credit.
Unfortunately, it's the brokers who first have to pay the margin calls, but to the exchange. They then receive the margin top-up from their clients.
In this case, the banks and brokers were paying, but receiving no margin top-up from their client. These banks had "offset their deals with Tsingshan by placing their own short positions on the LME", according to Bloomberg reports.
"Now they had to pay big margin calls on the exchange while receiving no margin from their client," Bloomberg said.
Some of these banks started to rapidly buy back nickel contracts in order to cover themselves, and this sent prices soaring even higher.
"It was a classic short squeeze, as the pain for Tsingshan, its brokers, and other shorts created a self-reinforcing cycle," Bloomberg said.
The LME promptly intervened and froze the price of nickel at US$80,000 per tonne, afterwards cancelling all trades that took place on the Tuesday morning – almost $4 billion, according to Bloomberg.
What's happened to ASX shares since?
The fallout has been that the price of nickel is now at unprecedented highs and those nickel producers, such as ASX shares Nickel Mines Ltd (ASX: NIC), Poseidon Nickel Ltd (ASX: POS) and BHP Group Ltd (ASX: BHP), each incurred losses in the days following.
With Nickel Mines, it was due to the association with Tsingshan, such that the company released a statement after its shares were placed in a trading halt. The trading halt came after the Nickel Mines share price had slumped 22%.
Aside from that, the S&P/ASX 300 Metals & Mining Index (ASX: XMM) also took a sharp downturn on the same day and has fallen more than 9% since – even as many commodities surge to decade-long highs.
Much of the reason why ASX commodity shares – particularly those involved with nickel – haven't received the news well boils down to how these markets operate.
One might presume higher prices is a huge positive for miners and producers, for instance.
However, that's not necessarily the case. Miners, manufacturers, producers and the like each use futures markets to place short trades, in order to hedge their exposure to the commodity.
Nickel miners, for example, want to ensure that, when it comes time to sell their product, they can get the best price. If prices fall, they are out of pocket.
That's why they short futures to effectively 'lock-in' the price they can sell at if this were to occur — an insurance of sorts. Buyers of nickel will do the opposite except to lock in a buying price.
Both sides will even 'carry' the trade forward, so to keep the hedging position active as time rolls on.
But when the market makes huge moves in the opposite direction – as it did on March 8 – they will be hit with margin calls or requests to put down more cash to keep the trades open.
No one is immune. It's not just the traders and speculators. It's the largest commodity players each having to scramble to cover their bases.
With this most recent saga, ASX nickel producers who participate in these markets are going to see some impact from the calamity at the earnings level, seeing as their short positions were more than likely taken out with the price surge.
Plus there's no certainty the gain in price will equate to higher sales figures for the companies involved. Sales have to be realised at these record prices for anything to occur.
In other words, it's not all just about demand and supply with commodities – it boils down to factors of hedging, speculation and market mechanics as well.
Thankfully, zooming out and scoping the wider market, there doesn't appear to have been a large spillover into other pockets of the ASX outside of the mining sector.
The S&P/ASX 200 Index (ASX: XJO) is trading sideways and is actually up 1% for the month, while the S&P/ASX 200 Financials Index (ASX: XFJ) has soared around 7.5%.
