Nickel prices tumbled by the maximum allowed as the market reopened in a messy sequence of false starts, with a glitch halting electronic trading for several hours and only a handful of contracts changing hands.

For the London Metal Exchange, already facing the wrath of investors for its decision to cancel US$3.9 billion in trades last week, it was another embarrassing setback. The turmoil in nickel has plunged the metals industry into chaos, after a huge short squeeze focused on Chinese tycoon Xiang Guangda drove the price up by an unprecedented 250 per cent in little more than 24 hours last week.

In private, exhausted traders and brokers -- many of whom have been working around the clock for several weeks -- expressed their exasperation with the exchange. 

A metals portfolio manager at one macro hedge fund said he’d spoken to half a dozen friends at other funds on Wednesday, all of whom had vowed never to trade nickel on the LME again. To make matters worse, many were stuck holding long positions they couldn’t redeem because the market had barely traded.

The nickel market had been closed since March 8. On Wednesday morning, trading briefly restarted at 8 a.m. and futures immediately fell through the daily limit before the market was suspended again. The exchange said it halted electronic trading to investigate a glitch that had allowed trades below the lower price limit and would cancel a “small number” of transactions. A phone-based trading system and the LME’s open-outcry floor were unaffected, with prices in “the Ring” dropping by the 5 per cent limit as well.

At 2 p.m., the exchange restarted electronic trading. But with no one willing to buy at the limit-down price of US$45,590 a ton, it took over an hour before there were any trades.

The nickel crisis is threatening to engulf the LME -- already, some angry investors have said they will walk away from trading on the market, which is owned by Hong Kong Exchanges and Clearing Ltd. The effects will also be felt well beyond the world of metals traders. Nickel is a key ingredient in both stainless steel and electric-car batteries, and the LME plays a crucial role as the main benchmark for pricing the various forms of metal that are used by manufacturers. 

“Liquidity will continue to diminish. Anyone thinking about stepping in to deliver liquidity to the market will certainly think twice,” said Keith Wildie, head of trading at Romco Metals. “I don’t think this is a market problem, I think it’s an existential problem for the LME.”

Prices remained limit-down by the close, and the LME later announced it would increase the price band to 8 per cent for Thursday’s trading in an attempt “to further assist the market to discover the true market price.”

For the squeeze that has gripped the nickel market for over a week, the drop in prices suggests that the tension may be easing. The LME had waited to announce the restart until Xiang’s Tsingshan Group Holding Co. reached a deal with its banks to prevent margin calls. The standstill agreement reduced the risk of a repeat of last week’s chaos, when spiraling prices left Tsingshan struggling to pay margin calls on its large nickel short position.

“In some sense it went as expected, in that we all expected it to fall, but it was just a question of how quickly,” said Colin Hamilton, managing director for commodities research at BMO Capital Markets.  

And while benchmark three-month futures were locked limit down, trading in other contracts pointed to a dramatic reversal in the tight supply conditions seen in the LME market prior to the closure.

April-delivery contracts traded as much as US$60-a-ton lower than May contracts, moving into a discount for the first time since October. They had been trading at steep premiums prior to the closure, in a condition known as backwardation that signals a shortfall in spot supply. Trading volumes on the April-May spread reached more than 1,700 lots, compared with just 249 lots traded on the benchmark three-month contract before the lower price limit was hit.

What’s more, the LME’s electronic order book showed a huge sell order -- equivalent to roughly 50,000 tons of nickel -- at the limit-down price of US$45,590 a ton, suggesting that the market could fall further once it is allowed to.

Ultimately, the immediate drop early Wednesday is illustrative of the mood in the market, Marex’s Alastair Munro said in a note.

“Longs just want to get out of a market that has become and is likely to remain dysfunctional,” he said.