Attempts to “corner” a metal market invariably end in tears, if not jail time, which is what happened with silver in 1980 and copper in 1995, so when the market in nickel “inverted” last week warnings were issued that an old game was being played in one of the new generation of battery metals.
The term inverted essentially means that the short-term price of a product, whether a metal or a government bond, rises above the long-term price, which is unnatural and a sign of trouble ahead. An inverted bond yield can be interpreted as a recession pointer.
Three Brothers And A Silver Plan
Silver had its crisis when three brothers who were heirs to the Hunt Oil fortune acquired, or attempted to acquire, one-third of the global supply of the metal.
Unfortunately for the Hunts, they used a lot of debt, and when commodity exchanges changed the rules, they faced expensive margin calls, followed by a Securities and Exchange Commission investigation, a $1 billion loss and eventual bankruptcy.
The copper cornering of the mid-1990s was a re-run of the game, with variations, but essentially involved a metal dealer working for Sumitomo, a Japanese trading company, buying physical copper, plus taking options and futures positions, to control an estimated 5% of the world’s copper, enough to dictate price movements in a relatively illiquid market.
The wheels came off for the dealer, Yasuo Hamanaka, in 1995 when new copper mines flooded the market for the metal, depressing the copper price at a time when Sumitomo held a big long-term position at prices inflated by Hamanaka’s trading – which Sumitomo later claimed was rogue activity but confirmed that the affair cost it around $2.6 billion.
The silver and copper background is important because last week Citi, a leading investment bank raised the Hamanaka specter despite the 69 year-old being long out of the news and out of jail after after serving an eight-year stretch .
According to Citi, nickel might be undergoing “a Hamanaka Moment” because the physical market for the metal has become “disconnected” from the futures market and a premium price routinely paid by Chinese steel mills which use nickel to make stainless steel has flipped into a discount for the first time ever.
“The escalating tightness on the London Metals Exchange (LME) and the disconnect with the loosening physical indicators outside the exchange remind us of similar market dynamics during the Sumitomo affair in 1995/96.” Citi said.
A glimpse of what’s happening in nickel, which has moved into what metal traders call backwardation (short-term price higher than long-term) can be seen in the LME data which features a sharp fall in stockpiles and a sharp fall in the price–the reverse of what might be expected because a surplus of anything generally drives the price down.
Stockpile Down, Price Down – A Disconnect
On the LME the nickel stockpile has dropped by 45% since earlier this month, falling from close to 160,000 tons to 88,000/t. But since October 14, when the nickel price hit a five year high of $8.14 a pound, it has fallen by 8% to $7.48/lb.
Until recently, Chinese nickel consumers paid a premium of around $250 a ton for prompt delivery of metal. But last week, the premium flipped into a $50/t discount, a very rare event in metal markets.
In Australia, a major producer of the particular type of nickel used to make batteries, there has been a burst of corporate activity, including plans to resurrect a mine made famous in 1969 as the centerpiece in what became known as the Poseidon scandal.
Speculators, fired by a one-off, high-grade nickel assay delivered during a strike by Canadian nickel workers, drove the 1969-70 price of Poseidon shares up by 35,000% from 53c to $187 in six months, though as with most red-hot mining stocks, it soon fizzled out.
Poseidon, however, is back as a born-again company backed by one of Australia’s richest men, the iron ore billionaire, Andrew Forrest, who has a 17% stake in the stock, and a private American company called Black Mountain Metals which has a 20% stake.
The Young American
Black Mountain, which is led by an American woman named Ashley Zumwalt-Forbes, bills itself as a “pure-play battery metals miner” having earlier this year acquired control of Lanfranchi, another old nickel mine.
As if all that isn’t enough to raise a flag about the nickel sector it’s interesting to note that Poseidon also owns two other mothballed nickel mines which were once operated by Russia’s leading mining company, Norilsk Nickel.
Citi’s tantalizing comparison with nickel today and copper during the Hamanaka era is supported by an argument that if tightness in supply (as shown by the falling stockpiles) was matched by broader fundamentals such as strong demand the Chinese nickel premiums would at least be holding.
“The fact they are falling sharply is a strong signal that the exchange backwardation is not matched by physical fundamentals,” Citi said.
And when a market is not matched by fundamentals it’s worth wondering what is happening and asking whether nickel is following silver and copper?