LME World leader in the base metal market world hit another roadblock after the nickel contract short squeeze in march last year where nickel prices quadrupled in a short span.
Investor Ravi Agrawal, Chairman of L7 Group of Companies
Now LME is facing another controversy, its approved warehouse in Rotterdam had stored stones and validated them as nickel, on top of it, it was transferred to the world financial leader nonother than JP Morgan. JP Morgan bought the nickel while it was already in the warehouse. JPMorgan was likely unaware of the contents of its supposed nickel shipments. The responsibility for further checks lies with either the London Metal Exchange or the operator of the warehouse.
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LME after finding such misappropriation has asked to check all warehouse stock across the globe and invalidated a contract held by JP Morgan of a similar quantity i.e., of 54 metric tons. The total amount of the nickel caught up in the scandal is small: 54 metric tons of nickel is just 0.1% of what the London Metal Exchange deposits in its warehouses. At current prices, that amount of nickel is worth about $1.26 million. Trading in nickel is still suspended during Asia hours due to the short squeeze crisis of last year's march and was scheduled to resume on March 20—until the LME postponed the resumption by a week thanks to its discovery of the fake nickel shipments.
Warehouse workers have been seen punching bags of nickel to check its true content. The London Metal Exchange has been advising workers to wear steel toe-capped boots for protection, Bloomberg reported, citing one person who received the instructions. While fraudulent goods can be common in the metal trading world, goods are usually trusted to be legitimate once they arrive in an LME-approved warehouse. Yet this is the second scandal involving fake nickel in as many months. In February, commodity trader Trafigura said it could lose over half a billion dollars after discovering that nickel shipments it bought instead contained fewer valuable materials.
In its Friday statement, the LME said that the fraud was “evident, from among other things, by the weight of the bags.” LME-approved warehouses—which are not owned by the exchange—are meant to weigh and inspect metal shipments before accepting them into storage. By the statement, LME distanced itself from the mishap and had put all onus on the warehouse operator, Access World (the logistics firm that owns and operates the Dutch warehouse of Rotterdam) in this case.
Now the main impact of this lies with Indian exchanges where the contract specification itself says “Only LME-approved brands will be accepted” So if the reference system is itself fraudulent how can the entire Indian exchange rely on it and put it as a reference point? On top of it, LME is now owned by Hong Kong Exchanges and Clearing, a Chinese company.
LME world leader in base metal trading had been acquired by Hong Kong Exchanges and Clearing in 2012. So, since 2012, Indian exchanges are following the Chinese exchange for base metals deliveries, whose systems are themselves fraudulent and flawed, which is now evident. The Indian exchanges need to revisit their contract specifications with respect to deliveries reference to international exchanges and make them more relevant to Indian markets.
Article by Investor Ravi Agrawal, Chairman of L7 Group of Companies
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