Chaos in Nickel: Geopolitics Meets Market Microstructure

Authored by

  • Michael Ponikiewicz

    VP, Portfolio Manager, Multi Asset Class Strategies

  • Ram Thirukkonda, CFA

    SVP, Senior Investment Strategist, Client Advisory

  • Seth Weingram, Ph.D.

    SVP, Director, Client Advisory

What just happened in nickel?

  • Nickel futures prices skyrocketed in recent days amid a violent short-squeeze that forced the London Metals Exchange (LME) to halt trading in the contracts on Tuesday, March 8th.

  • Conditions that triggered the squeeze played out in phases (top chart):

  1. Over the past two years, growth in demand for high-grade “Class 1” nickel, which is used in electric vehicle (EV) production, has outstripped production, depleting stocks (bottom chart). Futures prices ground steadily higher, as a result.

  2. Intensification of the Ukraine crisis added supply concerns, with Russia’s production of Class 1 nickel, which exceeds 15% of the global total, at risk due to sanctions.

  3. As prices rose further following the invasion, holders of short futures positions, including a Chinese metals producer that was hedging large physical holdings of nickel, faced pressure to cover, thereby inducing a historic squeeze.

Important nuances of the nickel market

  • LME futures are based on high-grade nickel. While new sources of nickel supply have emerged in recent years, much of it has been low-grade ferronickel, which is pure enough for stainless steel production but cannot be used in EV batteries without costly and highly toxic processing.

  • Owners of lower grade nickel stocks may have been hedging with the tradable Class 1-based nickel futures due to their historical correlation. However, ferronickel cannot be delivered to satisfy LME futures obligations due to its impurity, so such hedgers instead would have had to buy back the contracts.

Cautionary reminders for investors

  • In commodities investing, nuance matters. Much like when WTI crude futures dipped below zero in 2020, this episode is a reminder that while commodities offer valuable diversification and return generating opportunities, they demand deep institutional and microstructure knowledge.

  • In macro investing, it is critical to stay diversified and not rely solely on backward-looking risk management frameworks. Geopolitical shocks can (and will) produce sudden and historically exceptional market moves, which can produce severe losses from concentrated exposures that might appeal under normal market conditions. As such, portfolio construction should be informed by scenario analyses that cover a wide range of market circumstances, whether or not they have yet been observed.

Class 1 Nickel Price (LME futures)

Source: Acadian based on data from Bloomberg. For illustrative purposes only.

Class 1 Nickel: Evolution of the Physical Market

Data in thousands of metric tons. Production – Consumption is a 12-month moving average. Source: Acadian based on data from World Bureau of Metal Statistics. For illustrative purposes only.

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These materials provided herein may contain material, non-public information within the meaning of the United States Federal Securities Laws with respect to Acadian Asset Management LLC, BrightSphere Investment Group Inc. and/or their respective subsidiaries and affiliated entities.  The recipient of these materials agrees that it will not use any confidential information that may be contained herein to execute or recommend transactions in securities.  The recipient further acknowledges that it is aware that United States Federal and State securities laws prohibit any person or entity who has material, non-public information about a publicly-traded company from purchasing or selling securities of such company, or from communicating such information to any other person or entity under circumstances in which it is reasonably foreseeable that such person or entity is likely to sell or purchase such securities.

Acadian provides this material as a general overview of the firm, our processes and our investment capabilities. It has been provided for informational purposes only. It does not constitute or form part of any offer to issue or sell, or any solicitation of any offer to subscribe or to purchase, shares, units or other interests in investments that may be referred to herein and must not be construed as investment or financial product advice. Acadian has not considered any reader's financial situation, objective or needs in providing the relevant information.

The value of investments may fall as well as rise and you may not get back your original investment. Past performance is not necessarily a guide to future performance or returns. Acadian has taken all reasonable care to ensure that the information contained in this material is accurate at the time of its distribution, no representation or warranty, express or implied, is made as to the accuracy, reliability or completeness of such information.

This material contains privileged and confidential information and is intended only for the recipient/s. Any distribution, reproduction or other use of this presentation by recipients is strictly prohibited. If you are not the intended recipient and this presentation has been sent or passed on to you in error, please contact us immediately. Confidentiality and privilege are not lost by this presentation having been sent or passed on to you in error.

Acadian’s quantitative investment process is supported by extensive proprietary computer code. Acadian’s researchers, software developers, and IT teams follow a structured design, development, testing, change control, and review processes during the development of its systems and the implementation within our investment process. These controls and their effectiveness are subject to regular internal reviews, at least annual independent review by our SOC1 auditor. However, despite these extensive controls it is possible that errors may occur in coding and within the investment process, as is the case with any complex software or data-driven model, and no guarantee or warranty can be provided that any quantitative investment model is completely free of errors. Any such errors could have a negative impact on investment results. We have in place control systems and processes which are intended to identify in a timely manner any such errors which would have a material impact on the investment process.

Acadian Asset Management LLC has wholly owned affiliates located in London, Singapore, and Sydney. Pursuant to the terms of service level agreements with each affiliate, employees of Acadian Asset Management LLC may provide certain services on behalf of each affiliate and employees of each affiliate may provide certain administrative services, including marketing and client service, on behalf of Acadian Asset Management LLC.

Acadian Asset Management LLC is registered as an investment adviser with the U.S. Securities and Exchange Commission. Registration of an investment adviser does not imply any level of skill or training.

Acadian Asset Management (Singapore) Pte Ltd, (Registration Number: 199902125D) is licensed by the Monetary Authority of Singapore.

Acadian Asset Management (Australia) Limited (ABN 41 114 200 127) is the holder of Australian financial services license number 291872 ("AFSL"). Under the terms of its AFSL, Acadian Asset Management (Australia) Limited is limited to providing the financial services under its license to wholesale clients only. This marketing material is not to be provided to retail clients.

Acadian Asset Management (UK) Limited is authorized and regulated by the Financial Conduct Authority ('the FCA') and is a limited liability company incorporated in England and Wales with company number 05644066. Acadian Asset Management (UK) Limited will only make this material available to Professional Clients and Eligible Counterparties as defined by the FCA under the Markets in Financial Instruments Directive.