Nickel prices soared by 250% in a matter of a few days

We take a look at what caused the surge:

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Nickel is used for the production of stainless steel, and EV batteries, about 68% of the world’s nickel production is used in stainless steel, 17% is used for alloys, 8% in plating, 3% in foundries, and 4% in other applications, including EV battery manufacturing.

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Image: Reuters

The top 5 manufacturers of Nickel are:

  1. Indonesia: 38%
  2. Philippines: 4%
  3. Russia: 9%
  4. New Caledonia: 7%
  5. Australia: 6%

Well, what led to the rise? You might well be aware of the conflict that led to the increase in commodities prices, and we look at Nickel. There are concerns over supply disruptions since Russia produces 9% of the Nickel and Russian company Nornickel mines 10% of the Nickel globally.

But what made the price go up by 250%?

It is a phenomenon called a short squeeze.

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Image Credits: Investopedia

Here’s how it works: Commodity prices fluctuate based on demand and supply.

While rising commodity prices are good for companies selling commodities, companies are worried about what happens if the commodity’s price falls. In that case, they are left with no other option but to sell at a lower price.

The solution: open what is called a “short” position.

How? You borrow the commodity and sell it at the current market price when you are short. You would then repurchase the same item for less money when the price is lower and return it. So the price drop is your profit.

But what happens when prices go up?

That’s where this gets risky. If the price goes up, you still need to buy back the commodity you borrowed and sold.

The higher your buyback price, the more significant your losses.

Theoretically, the price could go up infinitely. So by shorting, you open yourself up to infinite losses.

Now, what’s a short-squeeze?

When the commodity prices start rising quickly, companies with prominent short positions start buying the commodity to trim their losses.

This, in turn, leads to even higher prices because the demand has increased. This is called a short squeeze.

In Nickle’s case, one such company, Tsingshan, had a significant short position. They were under the impression that the prices of Nickel would fall, and they could benefit from the falling price. But instead, because of the Russia-Ukraine war, market participants realised that supply would be affected and that the costs would increase.

The Result: Companies/Traders (Tsingshan being one of them) with short positions rushed to market to buy Nickel to close their short position (i.e. return their borrowed Nickle and control losses). In the process, the prices went up further. London Metal Exchange (LME), where Nickel is traded, realised that this situation could create a massive issue worldwide and stopped Nickel’s trading on the exchange.

This is the perfect example of why shorting is dangerous compared to regular investing.

With investing, you only lose what you have put in. Shorts have unlimited loss potential.

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