(Bloomberg) -- One year since a runaway short squeeze that transfixed the global financial world, the London Metal Exchange’s nickel market is still struggling to get back on its feet.

Average daily trading volumes are stuck at less than half the levels from before the crisis, while the number of open contracts has dropped by more than a third. The decline in activity has left the market vulnerable to erratic swings and raised questions about its continued viability as the place where benchmark prices are set for one of the world’s most important metals.

And the LME itself is still wading through the fallout. It will be the first exchange to face an enforcement investigation by the UK’s markets regulator, and has been hit by a slew of new lawsuits from market participants seeking damages over its controversial decision to cancel billions of dollars of trades at the peak of the price spike on March 8.

Read: The 18 Minutes of Trading Chaos That Broke the Nickel Market

While most of the world’s nickel is produced in different forms from the refined metal traded on the LME, the industry still relies on a functioning market to hedge pricing exposure, and for setting a price to use as a reference in deals.

The LME is “committed to ensuring confidence in the metals market, and will continue to work with global regulators and market participants to support the long-term health, efficiency and resilience of the market as a whole,” it said in a statement.

There is good news ahead, as the LME plans to allow nickel trading during Asian hours for the first time since the crisis on March 20, which it hopes will boost liquidity. 

But, for now, the market remains in limbo.

Backing Off

The decision last March to cancel $3.9 billion of trades was met with fury from hedge funds that stood to profit from the run up in prices, and several prominent investors vowed never to trade on the LME again.

One year later, the broad-based decline in trading activity shows that some sizable players in the physical market have also retreated. Bloomberg reported in October that Xiang Guangda, the tycoon at the center of the crisis, had been seeking to add new short positions as a hedge for his company’s nickel production, but was struggling to convince brokers to handle the trades. 

Trading Trickle 

The mood in the nickel market has changed dramatically in the past year. The squeeze last March was focused on a large short position held by Xiang’s Tsingshan Holding Group Co., but it was triggered by fears over the potential impact on supplies from Russia’s invasion of Ukraine. Those worries have proved unfounded — instead, surging production from Tsingshan’s Indonesian operations has helped drive the market into a ballooning surplus.

LME nickel prices have fallen more than 20% this year and, at $23,974 a ton on Wednesday, are down more than 75% from the peak above $100,000 a ton seen a year ago before the LME closed the market and canceled the day’s trades.

And yet trading activity has yet to return in earnest — average daily volumes were down 56% year-on-year in February.

Wild Swings 

The LME has a plan to lure both the industrial hedgers and investors back, but the illiquid and erratic trading conditions that have dogged the contract for the past year are an ongoing reminder of the scale of the challenge ahead.

The LME nickel market has only been open during European trading hours since the crisis, and one crucial step in the plan to revive activity will come with the long-awaited reopening of trading during Asian market hours later this month. But it’s far from clear that opening the market for longer will deliver a major boost to activity, as trading in the rival Shanghai nickel market has been hammered since the crisis too.

Shrinking Stocks 

The LME’s nickel challenges are partly because of a growing disconnect in the market — the exchange’s contract is based on refined nickel metal, but most of the world’s nickel is produced and used in different, less valuable forms. Inventories in the LME’s warehouse network have shrunk to critical levels, with total stocks at the lowest since 2008.

While producers including Tsingshan are racing to build plants to make metal that could be delivered on to the bourse to alleviate future squeezes, other prominent producers and consumers are pressing for the creation of an entirely new pricing benchmark that’s more closely linked to the raw materials that account for the bulk of global supply and demand.

©2023 Bloomberg L.P.