LME nickel squeeze and Tsingshan

In March 2022 the price of nickel on the London Metal Exchange (LME) rose by more than 270% in three trading days, from about $27,080 a tonne to an intraday peak of $101,365 a tonne on 8 March 2022. Nothing in the physical nickel market justified a move of that size; no supply-and-demand shock of that magnitude occurred. The move was driven by a short squeeze against large short positions, the biggest of which belonged to Tsingshan Holding Group (THG), the Chinese stainless-steel and nickel producer controlled by Xiang Guangda.

A producer's hedge, half hidden

Tsingshan was a genuine industrial producer of nickel and stainless steel, not a speculator. From around December 2021 it had built a short position of more than 150,000 tonnes of nickel, split between LME futures and bilateral over-the-counter (OTC) contracts with banks including JPMorgan, BNP Paribas, Standard Chartered and United Overseas Bank. For a producer, that short position was a standard hedge: if nickel prices fell, the loss on the mine and smelter was offset by a gain on the short. Only about one-fifth of the position sat on the exchange, where LME Clear, the central counterparty, could see it. The rest was OTC, largely invisible to the clearing house.

The squeeze builds

Russia's invasion of Ukraine on 24 February 2022 pushed nickel to a ten-year high on fears that sanctions would cut off Russian supply, then around 12% of the world total. Prices kept climbing through the first days of March as physical producers, Tsingshan among them, began buying back shorts in an increasingly illiquid market. On 4 March, nickel broke through $30,000 a tonne intraday for the first time since 2008. LME Clear responded by raising initial margin requirements by 12.5%, effective the close of business on 8 March, a decision taken with the market already under stress.

Two days of acceleration

The sharpest moves came on 7 and 8 March. On 7 March nickel opened above $30,000/t and closed at $50,300/t, a 69% rise in a single day, described in the LME's own review as roughly 25 standard deviations on a twenty-year basis. LME Clear's first margin call that morning, issued just after 07:30, alone totalled more than $5.1bn; four clearing members missed the deadline. On 8 March the price kept accelerating overnight, reaching $70,000/t by 05:44 and an intraday peak of $101,365/t by 06:08, a further 44% rise in 24 minutes, before retracing to around $80,000/t. At 08:15 GMT the LME suspended all nickel trading, judging the market disorderly.

The clearing house's own crisis

By this point the clearing house faced a crisis of its own, and the case stops being only about Tsingshan. Had LME Clear gone ahead with a scheduled intraday margin call of $19.75bn at 07:30 on 8 March, its own estimate was that seven clearing members would have defaulted, generating around $2.6bn of default losses, of which about $220m would have exceeded the clearing house's pre-funded default resources entirely. Rather than let that happen, the LME cancelled all nickel trades executed since midnight, an intervention it announced at 12:05 GMT that day. The population of cancelled trades is reported at roughly 9,000, worth an aggregate figure that different sources put between $3.9bn and $12bn depending on which trades are counted. Traders who had been on the winning side of the squeeze had their profits reversed along with everyone else's losses.

Survival, resumption, and litigation

Tsingshan itself did not default. Over the following days it negotiated a standstill agreement with its brokers, no further margin calls or forced close-outs for a period, and secured an emergency credit facility arranged by a bank group led by JPMorgan, with China Construction Bank among the lenders. Trading resumed on 16 March under new, much tighter daily price limits. Two hedge funds that had been on the winning side of the cancelled trades, Elliott Associates and Jane Street, sued the LME, arguing the cancellation was unlawful. The UK High Court ruled for the LME in November 2023, holding that its Trading Rule 22.1 gave it the power to cancel trades and that this power was not limited by the wider regulatory framework. The Court of Appeal and the Supreme Court later declined to overturn that ruling, closing the litigation in early 2025.

This is a futures contract case built on LME nickel futures, physically settled in 6-tonne lots, and it is the primary case for Lecture 2 on futures markets and central counterparties. It also connects to Lecture 5 on cost-of-carry, since the LME's own review documents a sharp shift into backwardation in the weeks before the squeeze, and to Lecture 6 on basis risk, since part of Tsingshan's exposure came from hedging Class 2 nickel pig iron production with a Class 1 LME contract, a quality and grade mismatch.

The core mechanism explains everything else in this case: for a short position, the approximate daily cash loss is tonnes short multiplied by the price increase. Tsingshan's underlying business, mining and smelting nickel and stainless steel worth tens of billions of dollars a year, was not insolvent at any point during the squeeze. A margin call, though, demands cash, due daily, and physical assets and future production do not turn into cash by the next deadline. The case is a clean illustration of margin converting a credit-risk question, whether a counterparty will eventually be able to pay, into a liquidity-risk question, whether it can pay today.

The clearing house itself came under direct strain. LME Clear's margin breaches in the first quarter of 2022 exceeded its own default fund by a wide margin, and its own internal estimate was that one more scheduled margin call on the morning of 8 March would have pushed seven clearing members into default. Central clearing concentrates and mutualises risk; it does not eliminate it, and a shock large enough can threaten the clearing house's own default waterfall.

Facing that, the exchange did not simply enforce its rulebook. It suspended trading and then cancelled trades that had already executed, an action later upheld by the UK courts as lawful under the LME's own Trading Rule 22.1. Under sufficient stress, an exchange's rules turn out not to be entirely fixed. Discretionary intervention becomes part of the risk that a market participant is exposed to, and that discretion survived legal challenge even years later.

A visibility problem sits underneath all of this. Roughly four-fifths of Tsingshan's position sat in OTC contracts, so the LME's ability to see and act on a build-up of concentrated risk was weakened well before the crisis. Regulatory position limits existed but were set too high to bind, and internal reviews of large positions did not catch the true scale of the exposure until it was already a crisis.