Did you know that it’s been more than a year since the LME debacle? Along with many others, I said at the time that their mistakes in handling the crisis would have far reaching implications for themselves and the market. The LME’s latest move is to announce two new consultations aimed at reforming rules and regulations and preventing a repeat of last year’s debacle.
If you missed the crisis: in early 2022, nickel prices skyrocketed, and the LME halted trading and even cancelled billions of dollars’ worth of deals. A very large number of major players in the market were furious with the LME’s actions and the fact that they are launching these consultations is further evidence that trust has not been restored.
The official statement from LME CEO Matthew Chamberlain is that “These consultations are the first big step in putting our reform plans into action.” The first consultation focuses on warehouse transparency. Right now, LME warehouses report data on some metal stocks not linked to futures contracts (called off-warrant inventories), but the new proposal would require full disclosure of all stored metal so because otherwise, when metal suddenly moves from off-warrant to on-warrant status, it can throw LME prices into a tailspin.
The second consultation is about how closing prices are calculated. The LME wants to move to a more “industry-standard” model, using a broader VWAP (volume-weighted average price) approach across more contracts. It’s a more consistent method that many in the industry are already familiar with.
There’s also talk of making some temporary changes permanent like the backwardation limit and deferred delivery mechanism that were put in place post-nickel crisis to prevent sharp price distortions when stock levels dip too low. Will these changes restore trust? In the long run they will surely help but in the short term, that’s a lot harder to guess.
Anthony Milewski
Chairman, Nickel 28 Capital
