LME nickel inventory plunge sparks supply crunch fears, but was the drawdown manipulation or demand?

LME nickel inventory supply crunch London Metal Exchange market manipulation
LME nickel inventory has dropped from over 150,000t at the end of September to 87,132t this week.

With nickel stockpiles suddenly plunging below 90,000t on the London Metal Exchange in October, industry participants are fearing the much-awaited supply crunch has arrived, but is it a result of the genuine physical market conditions or unsavoury manipulation tactics?

At the end of September, LME nickel inventories hovered at 152,000t and within weeks dropped below 90,000t – their lowest level since 2012.

The September/October drop has been labelled the biggest ever fall in LME nickel inventory, and prompted the LME to investigate.

In an email to Small Caps, the LME stated it was “actively monitoring the nickel market and collecting additional holistic data in respect of member and client activity.”

According to Bloomberg, the LME issued an email to its members requesting details of “significant client activity” associated with nickel warrants since the start of September.

Members were also asked to identify their clients and business reason for their transactions.

Potential deliberate market squeeze

The rationale behind the investigation is to ensure the inventory drawdown was not due to unsavoury practices including an attempt to generate an “abusive squeeze” on the market.

Both JP Morgan Chase and China’s Tsingshan Holding Group have come under the spotlight for an alleged huge inventory buy up at the start of October, sources told Bloomberg.

Sources estimated the duo had pulled out up to 80,000t from the exchange – squeezing an already tight market.

JP Morgan in spotlight for silver market manipulation

This is not the first time JP Morgan has been accused of attempting to corner a market, with CME Group data showing JP Morgan holds more than 50% of the world’s silver bullion.

The most recent CME COMEX data shows JP Morgan now owns more than 159.546 million troy ounces of bullion – compared to the combined global total of almost 314.55Moz.

A cloud of suspicion has also enveloped the bank for years with an ex-JP Morgan trader pleading guilty last year to manipulating precious metals markets between 2009 and 2015.

The bank has also been sued for manipulating the silver futures market in 2010 and 2011 – causing $30 million in losses to three traders.

Silver analyst Theodore Butler has been vocal about JP Morgan’s unsavoury behaviour in precious metals markets and has publicly questioned why the bank appears “above the law”.

Despite the allegations against JP Morgan in the silver market and its name linked to the latest nickel drawdown, the LME did concede the fall in inventory could still be a result of the physical market.

“While we note that market tightness may be reflective of genuine physical market conditions, we also have clear and robust procedures in place to ensure that any evidence of misconduct will result in disciplinary proceedings,” the exchange told Small Caps.

Nickel bulls have warned of a supply crunch for years

Many analysts and nickel miners anticipated a supply crunch had arrived in 2018, but US President Donald Trump’s trade war with China caused consumption to ease on uncertainty.

Despite abating, a dry project pipeline, mounting demand, ageing mines and rapidly accelerating electric vehicle and renewable energy sectors have continued to pressure the market.

As a result, nickel’s price began to gradually creep back upwards this year – picking up the pace in July as inventories eroded below 150,000t.

Hovering at 150,000t until the end of September, the inventory level represented only two months of supply.

With LME nickel inventories now dipping below 90,000t the supply situation has deteriorated, but the metal’s price has fallen instead of increasing.

Price not reflecting inventory levels

By the start of September, the metal’s price had climbed to US$18,620 per tonne after the world’s largest nickel producing nation Indonesia revealed it was bringing forward its nickel export ban to January 2020.

The incoming ban is two years ahead of schedule, with a transition period already underway.

However, on 22 October, the nickel price was attracting US$16,015/t, which is the lowest it’s been since late August, despite the October inventory drawdown.

Driven by supply fears, in September, Goldman Sachs lifted its 12-month price forecast for nickel from US$16,000/t to US$22,000/t.