November 28, 2022

Commodity Insite: Nickel market meltdown

Every day, without fail, the media touts the fact that inflation is running at its highest levels in 40 years.

The markets most responsible for inflationary pressures and grabbing the bulk of the headlines are crude oil, gasoline, gold, grains and other agricultural commodities.

But lately the newest commodity showing sharp gains and posting glaring headlines is the low-keyed and anything-but-glamorous nickel market.

From koat.com in a well-written piece entitled “Nickel prices on the rise following Russia invasion; expected to hit electric vehicle market,” John Cardinale writes: “Russia’s invasion is not only affecting the price of gas, it’s ramping up the price of a certain type of metal used in electric cars.

“Electric cars use lithium-ion batteries, most of those batteries are made up of the chemical element nickel.

“Since the Russian invasion of Ukraine, the price of nickel has gone up 250%.

“’It is truly an unprecedented event is that we saw nickel prices soar above $100,000 a ton,’ said UNM Economist, Reilly White.

“‘Russia makes up about 9% of the world’s total nickel production,’ White added.

“That puts Russia at third in the world for nickel production. White explained why the Russian invasion is playing with its price.”

On March 8, the price of nickel did rise over $100,000 per ton, but early this week settled back to around $48,000 a ton. When nickel was trading over $100,000 a ton, the melt-down value for nickel coins was about 15 cents each.

But can you melt U.S. coins?

From makeitfrommetal.com: “It is not illegal to melt, form, destroy, or otherwise modify U.S. coins, including pennies, unless the objective is fraudulent or with the intent of selling the raw materials of the coins for profit. Projects that use coins as materials are entirely legal in the United States.”

In other words, you cannot profit solely from the value of the metal content of the coins. Yes, you can make jewelry, trinkets or artwork and sell them for profit.

But if you gather a pile of coins and melt them down into scrap metal and sell what is left, that is not OK and is illegal.

There is an interesting tale about the nickel market making the rounds in recent days that involves a Chinese metal tycoon named Xian Guangda, also known as Big Shot.

From Fortune Magazine: “But his latest play may cause billions of dollars’ worth of losses for investors around the world. It’s already made the American nickel worth more melted than it is in solid form, since the five-cent coin now costs around 16 cents to mint.”

Forbes goes on: “As prices for nickel continued to rise, Xiang began shorting the metal, according to Bloomberg. When investors short stocks, they are betting that a commodity will lose value soon, while borrowing from brokers to sell on the open market. Once the value of the commodity falls, investors can buy the stock back at a profit before returning their loan to the broker.

“But if investors make a wrong bet, and the value of a commodity rises, they will need to cover themselves by buying back the stock at a higher price. This is called a ‘short squeeze,’ and it can make things even more expensive for a short-seller, as buying back the stock makes the value of the asset go even higher.

“That’s exactly what happened with Xiang.”

It is now estimated that Big Shot is sitting on an $8 billion loss on existing short positions in the nickel market. Plus, the London Metal Exchange canceled $4 billion worth of trades a few days ago and froze all further trading in nickel.

Big Shot got into a huge financial mess because he got stubborn. In the marketplace, the largest amount of money made is by being stubborn.

Unfortunately, the largest money losses occur by being stubborn. Plus, he did not use a stop to limit his losses.

Now, he has to answer the most difficult question when investing or speculating. That question is, “When to get out, with a profit or a loss?”

And Big Shot is going to discover there is no clear, absolute answer to that question.

I will say, however, the shenanigans by Big Shot in the nickel market gave me something to write about this week. Moving forward, there may be far more to this tale yet to be told.

Of course, with all the volatility going on amid a tremendous amount of media coverage there is a long list of other stories to be discussed, as well. But most of those tales when all is said and done may not be worth a plug nickel.