The LME nickel squeeze, 2022

A hedge that could not be delivered into

In March 2022 the price of nickel on the London Metal Exchange rose from around $29,000 a tonne to over $100,000 intraday, driven by margin calls on a very large short position held by a producer as a hedge against its own output. The exchange suspended trading and then cancelled the trades already done that morning. The episode is the clearest recent lesson in three things: that a hedge with the wrong deliverable is not a hedge, that margin is symmetric and physical gains are not, and that a market can close.

Open in the app · Case Studies · intermediate

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What the lesson covers

1. What happened
2. The position
3. Why it broke
4. What it cost
5. What it teaches

Key terms

• Short squeeze — A rise driven by shorts being forced to buy back into a market with too little offer to absorb them.
• Deliverable grade — The specification a contract can be settled with physically — and the thing a producer hedge must match.
• Basis risk — The exposure left when a hedge references something other than the asset actually held.
• Variation margin — The daily cash settlement of a derivative’s mark-to-market, owed whatever the physical position is worth.
• Trade cancellation — An exchange’s power to void executed trades, used here for a whole session’s nickel business.
• Liquidity risk — The risk of being unable to fund a position that is economically sound, which is what closes most of them.

Every key term, A to Z

In practice

Commodity producers hedge in exactly this way every day, and the fix is unglamorous: match the deliverable grade where possible, price the basis where it is not, and hold a funding facility sized for a move nobody expects. Exchanges and clearing houses have since paid closer attention to concentration in a single participant’s position.

Read next

• Commodity Forward — Agree a price today for delivery later
• Commodity Swap — Fixed price for floating market price
• Central Clearing — A central counterparty steps into every trade

In the app, The LME nickel squeeze, 2022 carries a five-step lesson, a worked example and a bank of twelve questions drawn differently every sitting.

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Educational content only. Nothing here is financial advice, an offer to trade, or a recommendation to buy or sell any instrument.