After almost a week of lockdown, the London Metal Exchange resumed trading in nickel on Wednesday – only to halt it almost immediately due to extreme volatility.
Nickel is a niche metal that plays a key role in the global supply chain. It’s also a canary in the coal mine for the potential impact of Russian military action in Ukraine and its potential impact on metals, mining and the materials needed to develop green energy alternatives.
“Current events are unprecedented,” the London Metal Exchange said in a press release announcing the March 8 suspension of trading.
3-month nickel prices on the stock exchange briefly jumped to a record high of over $100,000 a tonne and the closing price almost doubled in a week.
According to Mark Thornton, an economist at the Mises Institute, nickel’s steep rise in price is largely due to short selling and market moves. The Wall Street Journal reports that the key player is Chinese metals giant Tsingshan Holding Group, which “amassed billions of dollars in losses from bogus bets.”
But the events in Ukraine also had an impact, says Thornton.
“The metal went up slowly for several years and people sold it short, then the Russian invasion drove the price up because nickel is used in weapons and Russia is a major producer, and the price went up parabolic as a result,” he said. The war increased the price pressure.
That’s because Russia and Ukraine are major global metals producers. Ukraine ranks fourth in the world in terms of total natural resources and has the best proven recoverable uranium reserves according to Investment Monitor.
And Russia is a major producer of key elements in the electric vehicle supply chain, including aluminium, palladium and – particularly – nickel. Russia produces more than 10 percent of the world’s nickel and, by some estimates, about 14 percent of the world’s total mineral output.
Not to mention more traditional energy products like coal, oil and gas.
“The energy issue comes first. On the small side, certain US refiners need access to Russian dirty crude,” Thornton said. “On the big side, Europe needs natural gas from Russia, and this latter connection could send inflationary showers through European and world markets.”
When asked about the likely impact of the Russian invasion in the coming weeks, Richard Smith of the Foundation of the Study of Cycles did not see good news for the future.
“More of the same. Huge ‘limit-up’ spikes in metals and big gains in miners,” said Smith, a Berkeley mathematician and systems science expert. “Metals, mining and energy,” Smith added, “are obviously all affected. Some smaller markets will stop trading. The technology will also be hit by more problems in the chip supply chain.”
As a result of sanctions and trade suspensions, prices will rise “for the companies that can still provide natural resources” and fall for “the companies that depend on them and have to pay for them now, if they can get them at all”.
While the stock market is reacting poorly to the war, the long-term impact of sanctions or the shutdown of these metals could be mixed, says Robert Atkinson, president of the Information, Technology and Innovation Foundation and an expert on international trade and competitiveness. A key factor is whether Russia and Eastern Europe have a monopoly on these minerals, he said.
“If the disruptions are related to production or distribution issues as opposed to trade sanctions, that’s a different story,” Atkinson said. “World production would fall, but only until other sources are expanded.”
The net effect could be a redistribution of supply and demand rather than a steady increase in prices. When China hit Australia with sanctions and halted mineral exports, he said, “Australia found new markets with relative ease in nations that had previously sourced the minerals from nations that were now expanding Chinese exports.”
There is also the ability of the United States and other nations to increase their own production of must-have minerals by expanding their investment in mining. However, the industry is facing regulatory headwinds, including a proposal debated by Congress last fall to significantly increase taxes and royalties for the domestic mining industry. A bipartisan group of US senators shot it down, and in hindsight the proposal looks even more counterproductive.
“High price inflation has already been boiled into this long-simmering soup that major central banks have been cooking for years, even decades,” said Mark Thornton, von Mises’ economist. “And you can’t build and grow an economy without metals, so higher prices will make the coming recession worse.”
JP Morgan Chase and Barclays warn that previous forecasts for western economies will be revised downwards following Russia’s invasion of Ukraine.
“Rising commodity prices and increased risk aversion caused by the Russia-Ukraine war imply a stagflation shock,” wrote Christian Keller, head of economic research at Barclays. “While Europe appears more vulnerable than the US and UK is somewhere in between, China appears to be the least vulnerable.”
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