LME announces plan to ‘strengthen’ its markets; open to expanding nickel offering

The London Metal Exchange has announced a two-year plan to ‘strengthen and enhance’ its markets following the 2022 nickel saga.

The plan, announced by the exchange on Thursday March 30, aims to address the recommendations put forward in the Oliver Wyman report.

“The actions we have taken since March 2022 and those we have set out in today’s announcement are vital in building confidence in LME Nickel and to ensuring the long-term health and efficiency of LME markets more broadly,” Matthew Chamberlain, chief executive officer of the LME, said.

“We remain fully committed to supporting the trading community as we drive forward initiatives to build deep resilient liquidity across our markets, and we look forward to working with our stakeholders to deliver these enhancements,” he added.

The measures outlined are split by timeframe, between immediate, near-term and long-term actions.

The LME said it is “committed to rebuilding liquidity” in the LME nickel contract so it has introduced a fast-track listing approach and fee waiver for new LME nickel brands.

This move will potentially enable new brands to be delivered into LME warehouses, encouraging higher stock levels as well as additional liquidity on the contract. This follows the return of Asia trading hours to the contract as of March 27.

“The LME Group acknowledges market concerns regarding the levels of margin charged against the LME nickel contract. LME Clear is working with key stakeholders to assess the scope for methodology changes (which will also allow an optimal balance between the allocation of risk across the default fund, initial margin and concentration margin), and will seek the required regulatory approvals in due course,” the exchange said.

The LME confirmed that daily price limits will be made permanent after they were introduced in the aftermath of the nickel contract suspension.

“The application of the new calibration methodology provides illustrative revised limits for copper and aluminium of 12%. The LME intends to implement this methodology by the end of the second quarter 2023 and will communicate further details with the market in due course,” the exchange said.

Expanding into different nickel products

Alongside this fast-tracking of LME brand qualification, the bourse has outlined that it will consider broadening the contract to include “coarse nickel powder” to increase the amount of nickel class one material eligible for delivery.

This product is popular in the production of batteries because it can be readily converted into nickel sulphate.

The exchange said it will finalize its position on this matter following the LME Nickel Committee meeting in April 2023, including consideration of acceptability to consumers, handling and security.

“The LME also recognizes that an alternative pricing solution aimed specifically at the rapidly expanding class two nickel market could prove useful to some market participants,” the exchange said.

It added that it will work with the Qianhai Mercantile Exchange (QME) to develop a China-based spot market offering for nickel sulphate and nickel matte, which could support these trade flows in Asia.

“The LME additionally remains open to introducing Class II contracts to complement LME Nickel as the underlying markets evolve,” it added.

Class two nickel is the broad term used to refer to all non-LME/Shanghai Futures Exchange deliverable products such as nickel pig iron, sulfate, matte and mixed-hydroxide-precipitate (MHP).

Participants in the class two nickel market continue to express the growing need for hedging alternatives.

Fastmarkets calculated the price for nickel sulfate, cif China, Japan and Korea at $5,287 per tonne on March 24, with the nickel sulfate premium, cif China, Japan and Korea assessed at $1,200 per tonne on the same day.

Meanwhile, the assessment of the price for nickel sulfate, min 21%, max 22.5%; cobalt 10ppm max, exw China was 36,500-37,500 yuan ($5,298-5,444) per tonne on March 27, down from 38,500-40,000 yuan per tonne at the start of the month.

Measures mentioned will first require consultation prior to implementation and the first consultation is planned for publication during May 2023.

This consultation will put forward proposals to make permanent the temporary measures introduced in 2022 to address the current low-stock environment and will also propose the introduction of monthly reporting of eligible stock.

How to build electronic liquidity

The LME also said it would focus on continuing to evolve the closing price process into a more deterministic and industry-standard methodology, with key input from the LME User Committee.

“The LME will engage with the market later this year in respect of further enhancements to build electronic liquidity, including structural and incentive-based measures,” the exchange said.

“Such measures will be supported and complemented by the delivery of the new trading platform—LMEselect v10—due to launch in Q2 2024, which will provide a low latency, deterministic trading platform with a host of benefits that will encourage electronic liquidity.”

It added that LME Clear remains committed to the full implementation of its value-at-risk (VaR) initial margin methodology.

“Having already implemented this methodology as an internal risk modelling solution, LME Clear will now proceed to convert its full operations to VaR and will work with the market to identify the optimal timeline for implementation,” it added.

The exchange added that their two-year plan also includes other measures such as the further identification of market distortion risks, additional initiatives around over-the-counter (OTC) position and trade reporting. As well as many other actions that the exchange will communicate the progress of over the course of the next two years.

“In addition to laying out plans to support LME Clear resilience, we are also today reconfirming our commitment to evolving the Group’s market structure, which we continue to believe is key to ensuring we remain responsive to emerging risks and customer needs. Prioritizing transparency and maximizing trading and clearing efficiencies are crucial in driving greater liquidity for the benefit of the market as a whole,” James Cressy, LME Clear Interim CEO, said.

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