LONDON: The good news for the London Metal Exchange (LME) is that its nickel contract is trading again after last month’s chaotic suspension.

Average daily nickel volumes inevitably dropped sharply in March relative to February but were only 2% below those of March last year, which is not bad considering the six-day trading halt and subsequent stop-start return.

The bad news for the LME is that most of the trading appears to have been a mass rush for the exit door. Nickel market open interest has plunged to levels last seen in 2013.

The stampede has been equally dramatic in China, where market open interest on the Shanghai Futures Exchange nickel contract is the lowest since April 2015, which was only the second month of trading after its launch.

Nickel prices are still strong and big short positions hang over the market. Rapidly dwindling participation risks opening up a liquidity vacuum and a volatility trap.

Nickel’s wildness makes it a special case, but high prices are causing a broader risk retreat from the industrial metals sector as even the biggest players struggle to cope with the cost of financing positions. Indeed, Goldman Sachs warns that multiple parts of the commodities complex are in danger of falling into a self-perpetuating volatility trap.

MIND THE TRAP

As defined by Goldman Sachs, the global nickel market is already there. “A lack of risk capital lowers market participation, driving down liquidity and exacerbating volatility, and further discouraging potential lenders and investors, reinforcing lower participation and higher volatility,” is how the bank describes a volatility trap.

(“A financially constrained physical market”, April 3, 2022) There are obvious reasons for traders to wind down their risk exposure to nickel. Take your pick from the LME’s cancellation of trades, eye-watering margins or the prospect of enhanced regulatory scrutiny, both in London and China.