WTF x AWI #087 - Heavy Metal (aka what's happening with nickel)
This is issue number #087 of our weekly newsletter; this week we're going over the metal and nickel markets (among other things).
The nickel market climbs like a rocket and crashes like a rock.
Last Tuesday, The nickel market -- one of the most important metals on the planet -- went into uncharted territory.
Starting early in the morning UK-time, the London Mercantile Exchange (LME) saw nickel prices traded on their platform increase sharply. Within just 24 hours, the quoted rate to buy jumped 250%.
This rise, both in amount and in time, is unprecedented. Here’s what happened.
Commodities markets serve various roles for different participants.
For traders and hedge funds, these venues offer an opportunity to make lucrative bets on price swings via futures contracts. To amplify these (hopeful) returns, they often employ “leverage,” aka increasing their investment by borrowing money.
Miners & manufacturers use commodities markets to match supply with demand efficiently. Mining companies will sell metals like nickel at a fixed price for delivery later to manufacturers needing certainty. That way, both parties can make better long-term financial forecasts.
Buyers and producers can also better manage inventory and make additional profits by trading futures contracts on the exchange.
This last part combined with the first one that sent LME off of the rails.
In the build-up to Tuesday’s volatility, Chinese mega manufacturer Tsingshan Holdings took an enormous short position on nickel.
A short position is a bet that the price of an investment will go down in the near term.
What is short selling?
Short-selling means that an investor:
- borrows the asset,
- sells it a the current price,
- buys it later when it’s cheaper,
- returns the shares to the lender, pocketing the difference as profit.
When short sellers borrow an investment, they need to put up collateral with the lender, which is cash or other assets.
The borrower doesn’t have to put up collateral for the entire amount but instead needs to put a percentage down called “margin.” If the price of the asset increases after borrowing, the borrower will need to increase their collateral via a “margin call.”
Tsingshan’s short position was gigantic, and other institutional investors knew it.
These players began to push up nickel price on the LME, forcing Tsingshan into what’s called a “short squeeze.”
The nickel market unravels
By last Tuesday, the price for a ton of nickel jumped over 80,000 USD, surpassing the 100,000 USD mark for the first time.
Tsingshan’s short position that it would have to cover touched 2 billion USD, leaving it on the hook for a margin call it couldn’t immediately cover.
The Chinese firm wasn’t the only one with a short position, and, fearing a total market collapse, the LME suspended trading (the market is still closed).
What’s more is that the exchange canceled trades made during that day, infuriating traders who were trying to profit off of the chaos.
In short, the entire LME nickel market nearly collapsed due to speculative bets going wrong.
Now, as we await its reopening, Tsingshan is in the process of securing loans for its margin calls as the global markets await anxiously.
We’ve been through a lot since the pandemic started two years ago this week (go ahead and have that drink). With nickel now more expensive and its underlying market in shambles, the effects could travel throughout the global economy in ways we probably didn’t need right now.
ESG and Russia
Russia’s war of aggression against Ukraine is still dominating headlines in the financial news and beyond. (No surprises here).
First up on our list of WTF is going on with the Economy, thanks to Russia, is the ESG question.
If you’ll remember, ESG is a relatively new investing movement that stands for Environment, Social, Governance.
These three principles act as criteria for investors who want to ensure that their money helps build businesses that do good in the world.
(Quick note: ESG and SRI or “Socially Responsible Investing,” while similar, are two different styles. Want to learn more? check out our ebook on the topic here!).
Obviously, under the “E” in ESG, investing in Russia was already complicated. Energy was already a definite no-go for investors looking to put money into the Russian economy under these rules. The country is one of the biggest fossil fuel producers on the planet.
With Russia clearly not following the social principle (i.e., do good for society), many investors and fund companies are seriously reconsidering their entire investment strategy in the country.
Of course, investing in Russia isn’t exactly possible right now, considering that both the Moscow Stock Exchange remains closed and many ETFs tracking Russia are either shutting down or suspending operations.
Still, the question about ESG and Russia will remain long after the conflict ends, which will dictate the direction of their economic rebuild.
Get these insights straight to your inbox each Tuesday when we publish and never miss out on what people living abroad need to know about the economy.
Russia getting de-indexed
Speaking of ETFs and index investing, the question of “should we invest in Russia” keeps reverberating across the investment world.
It’s no secret that building a portfolio of diversified ETFs is an amazingly-fantastic way to build your wealth over the long run.
One of the most popular strategies is to invest in funds that track developing markets -- countries that aren’t quite up to the living standards of Western Europe, North America, and some APAC countries but are on their way.
Russia falls firmly into the “developing market” economy (at least it did until unparalleled sanctions put the kibosh on the market). Now, it’s likely to face a downgrade to “frontier economy,” at least for the foreseeable future.
Indice makers like S&P Global and MSCI responded to the war in Ukraine by removing Russia from their indexes.
The impact for Russian companies will be dire as global index investors pump hundreds of millions of dollars into their stock markets each year via these funds.
For long-term investors who prefer to use a handful of ETFs to build global diversification, this removal automatically answers the ESG question for them.
When the dust settles, it will be interesting to see when or even if Russia makes it back to these vaunted tools.
Sunflower oil goes the way of toilet paper circa March 2020
If you’re living in Europe, you might have noticed some stores posting signs about limiting vegetable oil purchases.
As it turns out, Ukraine is one of the leading suppliers of the popular cooking oil, and with the war upheaving their economy and infrastructure, the supply chain faces stiff disruption.
Of course, we humans, being totally rational beings 🙄 took the news of this shortage the best way we could: by panic buying oil.
We obviously didn’t learn our lesson two years ago to keep calm and maybe cook with butter or olive oil instead. (Note: doing so would fit nicely with our suggestion to “go paleo” from last week’s issue).
Stores had to respond to supply disruption by limiting purchases until the chain could work itself out.
(Also, we’ve read some news sources claiming that the shortage of sunflower oil is somehow linked to inflation. It’s not. The lack is a supply chain issue like many of the others we’ve seen over the past year.
The shortage will increase the price, but only due to limited supply. Once supply comes back or we find a substitute, prices will decrease. If someone gives you the inflation argument, share this link with them to sign up for our newsletter: https://share.abroaden.co/ywa. Please and Thank you).
Our article in Barcelona Metropolitan
We had a guest post in the fabulous Barcelona Metropolitan news magazine a few weeks back.
If you missed it, we covered some of the tips expats in Barcelona need to know to make intelligent investment decisions this year (and beyond). Check it out here!