Hit hard by Ukraine war, Fortune 500 Tsingshan wins respite
Chinese metals group Tsingshan has won a respite from banks on nickel bet following the disruptions caused in the market by the Russian invasion of Ukraine.
According to certain media sources, the 200,000-ton nickel short order made by Tsingshan Group, a Fortune 500 business in Wenzhou, may not be available in stock.
It is said the Russian nickel was taken off the London Metal Exchange because of the Russia-Ukraine crisis and financial penalties.
Some market rumors are circulating that Glencore might squeeze Tsingshan on LME Nickel for its 60% stake in a nickel mine in Indonesia.
Tsingshan Group is the partner of Huayou that develops the nickel project. According to the Financial Times, Tsingshan has reached an agreement with its bank counterparts to settle a nickel bet that caused market turmoil, paving the way for trading to resume on Wednesday at the London Metal Exchange.
Banks including as JPMorgan Chase and Standard Chartered have agreed not to close Tsingshan’s position or issue any margin calls, which are requests for additional funds to cover losses.
The halt agreement will allow the two parties time to work out an agreement on a new secured credit facility that the world’s largest stainless steel manufacturer may utilise for its “nickel margin and settlement obligations.”
In an unusual public statement, the privately held corporation stated that a “integral aspect” of the arrangement was a “mechanism for the Tsingshan Group to decrease current hedge holdings in a fair and orderly way when anomalous market conditions subside.”
Tsingshan’s short-squeezed
According to certain media reports, Tsingshan’s floating loss might exceed USD 8 billion based on the scale of the lack of supply of 200,000 tons of nickel.
If the price rally persists and without the deal with counterparts, Tsingshan’s short position could wipe out some of its production profits.
Tsingshan earlier declined to comment in multiple requests for inquiry, and Swiss financial trader Glencore responded that the claims were baseless.
There have been rumors that Chinese companies have encountered short-squeeze in the market. Bloomberg did report that Tsingshan started building short positions last year, in part to hedge against rising production with the belief that the nickel price rally would fade.
Tsingshan’s production costs in Indonesia are less than USD 10,000 a ton, while the LME’s benchmark price is more than USD 23,000.
It is believed that Tsingshan has accumulated large short positions in nickel derivatives markets to hedge against possible price falls during nickel production. The LME data shows that there is an unidentified nickel inventory holder who holds at least half of the LME inventory (as of February 9, 2022).
Nickel warehouse
The unidentified stockist holds between 50% and 80% of the nickel warehouse receipts monitored by the LME, according to LME daily data. Holder of LME warehouse receipt could withdraw the spot according to the warehouse receipt.
The rival of this magnitude, it is believed, could be Glencore. Most important of all, the concern is whether Tsingshan will continue to compete with the bulls (Glencore) or close out the short positions. Bloomberg’s report pointed out that since Tsingshan’s nickel products are not eligible for delivery with the LME futures contract, its futures shorts are not a perfect hedge against its products.
This reveals that if Tsingshan is forced to increase margin or move positions, these short positions would consume a lot of its cash flow.
Although there have been warnings through news reports, unfortunately, under the aggravated geographical risks due to the Russia-Ukraine crisis, extreme market deals have further exacerbated the Tsingshan Group’s position.
This reveals that Tsingshan Group has not been able to effectively control risks and cease losses promptly.
Some Chinese companies and investors, who often treat market risks with conventional thinking, are lacking effective early warning and risk control for external risks that cause an adjustment in the trading environment.
Under the current aggravated geography risks, its impact often exceeds the market fluctuations in the normal state, bringing an unexpected influence on companies and investors. The condition recalls the rare phenomenon of “negative oil prices” in international crude oil futures during the COVID-19 pandemic.
At that time, the acute contraction of crude oil demand as a result of the pandemic caused a rare negative value of crude oil futures prices. This extreme condition led to the liquidation of trading products including Yuan You Bao, causing huge losses to investors and financial institutions.
LME suspends market trading
In the case of nickel, the LME had to suspend nickel market trading at 4 pm on March 8, Beijing time. It explained that the decision on the suspension was made due to the impact of the Russia-Ukraine crisis and the price trend in Asia.
At present, margins on the LME nickel contract were based on the closing price on March 7, 2022. The LME Clearing would consider additional measures, if any, based on a risk management perspective. Market closures caused by such extreme transactions are rare not only in the LME but also in international commodity markets.
This demonstrates that not only private enterprises were unable to take timely measures to deal with the aggravated geographical risks, but the market too had no effective solution on this. The latest information shows that the LME would delay the delivery of all spot nickel contracts originally scheduled for March 9, 2022.
The LME also cancels all nickel trades executed on or after 12 am U.K. time on March 8, 2022 on OTC and LME select screen trading systems.
This means that Tsingshan Group might recover some of the losses on the transaction. Because of the increased geopolitical risks, the futures trading market should have some control over risky transactions, but should not follow usual norms at this time.
For example, for some extreme actions that may pose systemic risks to the market, the management should apply some limits so that the market and critical institutions do not collapse easily, given the implications for the entire industry. This is the sort of difficulty that the LME is facing at the moment. As a result, it is legitimate for the LME to interfere as needed.
A lesson
Regardless of whether Chinese companies could recover their losses afterwards, it has become a lesson because the impacts are profound and painful.
More important is that in the future, these companies must always be prepared in advance, rather than merely observing despite various early warnings. Researchers at ANBOUND point out that investors should learn the lessons and enhance their macro-judgment of geopolitical risks.
The current rise in geographical risks has not only brought chaos to the commodity and energy markets but also affected the global capital market which could cause a major global financial turmoil. The overall market environment has undergone dramatic changes.
Under this circumstance, enterprises and investors can no longer invest and operate merely from the perspective of market transactions, nor evaluate market risks under conventional thinking. The various market extremes exhibit that the current market is anything but a “normal” market now.
Therefore, under the aggravated geopolitical risks, investment strategies and trading arrangements will require prudential contemplation.