Nickel Market Crisis Sends London Metal Exchange Scrambling to Prevent Damage

Tsingshan couldn’t be reached for comment.

The London Metal Exchange suspended the nickel market early Tuesday, the first time it had paused trading in a metal contract since the collapse of an international tin cartel in 1985. The decision followed a near doubling in prices over a few hours—a run-up traders said had no precedent.

A key unresolved concern for the exchange Wednesday was the ability of Tsingshan and its brokers to meet margin calls and avoid default in the coming days and weeks, a person familiar with the exchange said.

The disorder has ramifications for miners, steelmakers and electric-vehicle makers because LME prices are used as a benchmark in the metals industry. Commodity markets were already in turmoil from the war in Ukraine and punishing sanctions, which have cut supply lines and stifled trading of metals, energy and food, essential to the running of the global economy.

The LME faced criticism from investors and financial traders, who said the decision to cancel trades executed before the suspension caused them to miss out on profits and lose money on paired trades between nickel and other assets.

“Clearly these are unprecedented times and they have called for us to take action we would not wish to have taken,” LME Chief Executive Matthew Chamberlain said. “We faced a choice between ensuring the overall and longer-term financial stability of the market, and the shorter-term trading profits of those participants who had traded on Tuesday morning.”

In a statement, the U.K.’s Financial Conduct Authority said it was in close contact with the LME and other relevant parties.

Fueling the gains early this week was an effort by brokers which count Tsingshan as a client to buy back nickel contracts they had sold on its behalf. The company had failed to stump up cash to meet margin calls, which mounted as prices rose.

Tsingshan received a financial lifeline to help meet those margin calls. It secured bridge loans from banks including JPMorgan Chase & Co. and China Construction Bank Corp. , according to people familiar with the matter. Bloomberg earlier reported that Tsingshan had obtained a loan package from domestic and international lenders.

Tsingshan has strategic importance to China’s metals industry as a major supplier of nickel and steel. Chinese regulators stepped in and called on domestic banks to help support the company, one of the people said. The fact that Tsingshan’s nickel forward contracts were for normal hedging purposes—and not speculative in nature—helped the company win government support, the person added.

Once prices began to shoot up earlier in the week, traders said, Tsingshan had two ways to unwind the trade: Buy back the forward contracts, or deliver metal against them. The first option was difficult, because it would have had to lock in massive losses.

Even though Tsingshan is the world’s biggest nickel producer, the second option was also tricky. Nickel delivered into LME warehouses must be at least 99.8% pure, a requirement not met by the nickel-pig iron and nickel matte Tsingshan produces in huge quantities.

The company moved to address that dilemma Wednesday. Tsingshan told the Securities Times—a financial paper run by the Communist Party’s flagship People’s Daily newspaper—that it had managed to deploy enough nickel plates for physical delivery. The privately held company said it plans to swap the nickel matte it produces for domestic metal nickel plates that can be used to settle its outstanding contracts.

In a sign Tsingshan’s steps had soothed nerves in the nickel market, prices for some contracts on the Shanghai Futures Exchange fell the maximum 17% Wednesday evening. Previously, some nickel contracts had been suspended for rising by the maximum amount.

The LME has said it would open the market cautiously with a shortened trading day and limits on moves in nickel prices in either direction. It has asked companies with big long positions and big short positions in the metal to pair off those positions, reducing the risk of a further short squeeze. It could resort to forcing the companies to net out their positions, said the person familiar with the exchange.

Investors on the exchange were furious about the contract cancellations, which they say give an advantage to Tsingshan, its lenders and the LME. One hedge-fund manager said he had cut his positions on the LME by 90% because he couldn’t put clients’ money on the line and risk the trades being canceled.

A point of contention among some bruised traders: The LME is owned by Hong Kong Exchanges and Clearing, and its actions helped buy a major Chinese company and its state-owned lenders time to stem losses.

Mr. Chamberlain said the nationality of the company played no part in the LME’s response to the seizing up of the nickel market. “I can unambiguously say that the nationality of the participant was not a relevant factor here,” he said.

Even if the efforts succeed, the nickel blowup is a black eye for Mr. Chamberlain, who is leaving to join cryptocurrency firm Komainu.

A former UBS Group AG banker who advised Hong Kong Exchanges and Clearing on its 2012 acquisition of the LME, Mr. Chamberlain has sought to make the exchange more amenable to financial players. He tried to draw a new clientele of hedge funds and algorithmic traders to an exchange long dominated by miners and smelters. The strategy aimed to raise volumes in the face of competition from CME Group and Shanghai Futures Exchange.

—Alistair MacDonald contributed to this article.

Write to Rebecca Feng at [email protected], Joe Wallace at [email protected] and Jing Yang at [email protected]