Opinion: The world’s oldest metals exchange saved a whale but attracted a shark | Stephen Bartholomeusz
When the London Metals Exchange made the decision to undo a day’s trading after the price of nickelit saved a Chinese billionaire, some of its own members and maybe its own clearing house. It also, however, wiped out the hefty profits of those on the other side of a massive short position.
For months a self-made Chinese billionaire, Xiang Guangda, had been building a massive short position in the metal. His Tsingshan Holdings, China’s biggest stainless steel group and one of the world’s leading nickel producers, had been using the LME and over-the-counter derivative contracts with banks to hedge his physical exposure to nickel prices.
In theory the losses faced by Xiang Guangda should have been offset by Tsingshan’s physical nickel production but the LME contracts, which can be settled via physical delivery, are for pure nickel whereas his production is of lesser grades. The more immediate problem was the instant need for the enormous amounts of cash to meet the margin calls, which he didn’t have.
Its critics say it damaged the integrity of the market – Elliott says it acted unlawfully and violated its human rights -- undermined confidence in the market, exposed market participants to losses by its actions and were a product of its conflicts of interest. Elliott Management is a familiar name to Australian investors, having aggressively campaigned for BHP to collapse its dual-listed structure and shed its oil and gas assets.There’s no doubt, however, that the exchange’s decision protected the short sellers, its own brokers and its clearing house and those traders who were hedging physical production with short positions over the purely financial players like Elliott and Jane Street Capital who held the long positions.
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