The London Metal Exchange (LME) discovered bags of stones instead of the nickel that underpinned a handful of its contracts at a warehouse in Rotterdam, the Netherlands, in a revelation that would deliver another blow to confidence in the embattled exchange.
The amount of metal represents just 0.14 percent of live nickel inventories on the LME, worth about US$1.3 million at current prices, so the immediate effect on the metals markets is limited.
However, the shock announcement has much wider implications. In an industry riddled with scandals, the LME’s contracts are viewed as unquestionably safe. The news that even a few of them have been compromised would raise fresh questions about its systems and procedures, while the 146-year old exchange is still wading through the fallout of its last nickel crisis.
“LME warehouse warrants used to be the gold standard of warehouse warrants around the world, treated as a near-cash equivalent,” John MacNamara, chief executive officer of Carshalton Commodities Ltd and a veteran commodity trade finance banker, wrote on LinkedIn. “Something has gone horribly wrong at the LME.”
It also comes at a fraught time for the wider metals world, after trading giant Trafigura Group last month revealed that it had been the victim of a vast alleged fraud involving missing nickel cargoes.
The news that a powerful player such as Trafigura is facing hundreds of millions of dollars in losses has spooked others in the industry and prompted some to check on their own metal cargoes.
However, the one place where metal has always been considered perfectly safe is once it has been registered “on warrant” in an LME-approved warehouse. Contracts on the LME, which are the global benchmarks for industrial metals including aluminum, copper and nickel, are underpinned by physical metal in the network of warehouses around the world — any trader holding a contract to delivery receives a parcel of metal in an LME-registered warehouse.
The LME discovered the problem after it received reports that some nickel delivered out of a warehouse in Rotterdam contained bags of stones instead of nickel briquettes.
The warehouse is operated by Access World, people familiar with the matter said.
The company was previously owned by Glencore PLC, and in January said that it had been acquired by Global Capital Merchants Ltd.
Access World, which is one of the more prominent companies that operates facilities registered on the LME network, investigated and subsequently found that the bags of “nickel” underlying nine contracts — representing 54 tonnes of metal — did not contain the nickel that they should have.
The nine warrants have been invalidated and the warrant owner has been notified, the LME said, without naming the owner.
The metal had been registered as live in the LME warehouse since early last year, one of the people said.
For the exchange, the issue is a major headache, coming as it is still dealing with the fallout of its previous nickel crisis — the cancelation of billions of dollars in trades after prices spiked last year.
The UK Financial Conduct Authority earlier this month announced its first ever enforcement probe into an exchange over the LME’s conduct in the nickel crisis, and the exchange has promised to announce a series of reforms by the end of this month.
The nickel market has struggled to return to normal since the crisis, and is still operating on shortened hours. The LME had planned to allow the beleaguered nickel contract to resume trading during Asian hours from today, but has delayed the move by a week.
“We need the LME to function properly,” Bank of America Corp metals research head Michael Widmer said. “It’s just not at the moment, that’s the problem.”
Nickel on Friday rose 2.56 percent to US$23,204 per tonne, gaining 2.38 percent from the previous week.
‧ Gold for April delivery rose US$50.50 to US$1,973.50 per ounce, rising 5.69 percent from a week earlier.
‧ Silver for May delivery gained US$0.77 to US$22.46 per ounce, up 9.51 percent weekly.
‧ May copper rose US$0.3 to US$3.89 per pound, falling 3.47 percent for the week.
Additional reporting by staff writer, with AP
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