by Ivan Martchev

March 15, 2022

It is not every day that the London Metals Exchange (LME) shuts down and begins busting trades for fear that some major metals brokers might go out of business due to big clients failing to meet margin calls.

Nickel Record High Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary

Here is what TradingEconomics.com posted on the Nickel trading drama last week:

“Nickel prices stabilized around $48,000 per tonne* after briefly topping the $100,000 mark for the first time on record on March 8th and forcing the London Metal Exchange to halt trading after the brokers were struggling to pay margin calls. As a result, the LME said it would cancel all nickel transactions that had taken place on March 8th and, after restarting, trading will only happen in European hours and with a 10% daily limit on price moves.

“Western sanctions against Russia over its invasion of Ukraine sparked concerns over the metal supply. Russia accounts for about 10% of the global nickel supply, mainly for use in stainless steel and electric vehicle batteries. Nickel was already rallying before Russia’s invasion of Ukraine as robust demand from the stainless steel and battery industry drained inventories, which now stand at 76,830 tonnes in LME-registered warehouses, their lowest since 2019.”

              *Tonne is the British term for a “metric ton” (1,000 kilograms), equivalent to about 2,205 pounds.

Clearly, this is panic buying, triggering an avalanche of stops on short positions due to the Ukrainian crisis and the waves of sanctions that are being imposed on the Russian Federation on multiple fronts.

Of peculiar interest is an $8 billion margin call on Xiang Guangda, the billionaire owner of Tsingshan Holding Group, which brought in Chinese regulators trying to engineer a bailout. The size of the bearish bet hasn’t been officially announced, but it is understood to be at least 100,000 tons of nickel. Curiously, Xiang remains confident that nickel’s price will fall and wants to remain short after the bailout!

To Mr. Xiang, I can only repeat the words of the late British economist John Maynard Keynes: “Markets can remain irrational longer than you can remain solvent,” meaning that the price of nickel may indeed decline to more “normal” levels, but if there is no one to bail out Mr. Xiang yet again, what would be the point of being “right” on the direction of nickel later on – or would that even qualify as being “right”?

The world may be trying to unplug the Russians from the global financial system, but I believe there will be unintended consequences, the bulk of which we have yet to see. If sanctions won’t stop the Russians, would those sanctions be worth it, if the unintended consequences on sanctioning countries are so large that they would result in making the bad situation worse for the Allies, without really resolving anything?ORE Commodity Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The Russians are yet to default on their sovereign debt, and who knows what major banks are holding derivatives tied to currency levels and commodity prices? I think the longer the fighting in Ukraine lasts, the more repercussions we will see in commodity and currency markets and the global financial system.

Oil could take out its 2008 high of $150 per barrel, and there are spillovers in other commodities – not just nickel – due to supply disruptions that are getting worse with the new sanctions. That means the inflation picture, which was supposed to get better over the summer with a normalizing global economy after COVID, is actually likely to deteriorate the longer the fighting persists.

From Russia with Losses

The Financial Times reported that Blackrock has been hit with a $17 billion loss due to the fall in value of the prices of Russian securities in the funds it manages, many of them ETFs, so they are technically passive. To be more precise, that would not be Blackrock’s own money but rather money of the clients who invested with them in those funds. That may be a fine point, but one worth noting.Russia Govt Bond Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary

It will get more interesting with PIMCO, the active bond manager, which holds Russian sovereign debt in some of its funds. PIMCO also wrote quite a few credit default swaps (CDSs) on Russian debt, arguably because of the pristine conditions of the Russian macro finances before the invasion, when they could actually access their foreign exchange reserves. If Russia defaults, those CDSs would blow up and those bonds would be selling at pennies on the dollar. Russia has not defaulted yet, but I am sure that sanctions will provoke some drama on that front in the next week or two.

All content above represents the opinion of Ivan Martchev of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

A Look Ahead by Louis Navellier
The Messy Geopolitics of Global Energy

Income Mail by Bryan Perry
U.S. Natural Gas Prices Could Rally Big by 2023

Growth Mail by Gary Alexander
Beware the Ides of March (Again)

Global Mail by Ivan Martchev
Nickel’s Monstrous Short Squeeze

Sector Spotlight by Jason Bodner
At Times Like This, What Would Warren Do?

View Full Archive
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About The Author

Ivan Martchev
INVESTMENT STRATEGIST

Ivan Martchev is an investment strategist with Navellier.  Previously, Ivan served as editorial director at InvestorPlace Media. Ivan was editor of Louis Rukeyser’s Mutual Funds and associate editor of Personal Finance. Ivan is also co-author of The Silk Road to Riches (Financial Times Press). The book provided analysis of geopolitical issues and investment strategy in natural resources and emerging markets with an emphasis on Asia. The book also correctly predicted the collapse in the U.S. real estate market, the rise of precious metals, and the resulting increased investor interest in emerging markets. Ivan’s commentaries have been published by MSNBC, The Motley Fool, MarketWatch, and others. All content of “Global Mail” represents the opinion of Ivan Martchev

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