Traders work on the floor of the London Metal Exchange in London, Britain, September 27, 2018.
Traders work on the floor of the London Metal Exchange in London, Britain, September 27, 2018. Reuters / Simon Dawson

The London Metal Exchange (LME) was forced to halt trading in nickel and said it would cancel trades as prices doubled to more than $100,000 per tonne on Tuesday, a surge sources blamed on short covering by one of the world's top producers.

The trading shutdown after Western sanctions threatened supply from major producer Russia is the biggest crisis to hit the 145-year-old exchange in decades.

In the 1990s a rogue Sumitomo trader tried to corner the copper market and tin trading was stopped for five years in the 1980s.

The LME move came amid market panic caused by Russia's invasion of Ukraine, with buyers scrambling for the metal crucial for making stainless steel and electric vehicle batteries.

"The current events are unprecedented," the LME said in a notice to members. "The suspension of the nickel market has created a number of issues for market participants which need to be addressed."

Some position holders have been struggling to pay margin calls, traders said.

China's Tsingshan Holding Group, one of the world's top nickel and stainless steel producers, had been building a short position in nickel since last year, betting prices would fall, three sources familiar with the matter said.

Prices rocketed as Tsingshan bought large amounts of nickel to reduce those short bets and its exposure to costly margin calls, they said.

Tsingshan and the LME declined to comment.

The LME raised margin requirements for nickel contracts by 12.5% to $2,250 a tonne and suspended trading of nickel on all venues for at least the rest of the day.

"For the LME to stop trading for an entire day, that doesn't help its long-term relevance," said Colin Hamilton, managing director of commodities research at BMO Capital Markets. "This is meant to be a market of last resort and people can't get inventories to deliver against positions."

The LME announced that all trades will be voided from midnight until 8:15 a.m. on Tuesday when trading stopped and added that it was considering a closure of several days.

In another rare move, it also deferred physical delivery of maturing contracts.

"The LME will actively plan for the reopening of the nickel market, and will announce the mechanics of this to the market as soon as possible."

Three-month nickel on the LME more than doubled to $101,365 a tonne before the LME halted trade on its electronic systems and in the open outcry ring.

Nickel had pared gains to $80,000 a tonne when trading was halted, up 66% on the day and a staggering 177% since Monday.

Graphic: Nickel Prices Doubles in Hours to Record over $100,000:



The explosive gains, which have seen prices quadruple over the past week, resulted from two major players facing off, said Malcolm Freeman of Kingdom Futures, who declined to identify them.

One entity has control of between 50% and 80% of LME inventories, LME data shows.

"There's a very big short and a very big long who've been sparring. And because of their sparring, it's brutalised so many other shorts," said Freeman.

Some small industrial users have been caught in the crossfire, having taken positions to get physical delivery but then hit with margins calls costing millions of dollars, he added.

The uncertainty caused by Russia's invasion and resulting sanctions has added to an already bullish nickel market due to low inventories, which have halved on the LME since October.

Russia not only supplies about 10% of the world's nickel but Russia's Nornickel is the world's biggest supplier of battery- grade nickel at 15%-20% of global supply, said JPMorgan analyst Dominic O'Kane.

The LME is owned by Hong Kong Exchanges and Clearing Ltd.