JPMorgan Emerges As Largest Counterparty To Chinese Tycoon's Massive Nickel Short Squeeze

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by Tyler Durden
Friday, Mar 11, 2022 - 06:30 PM

Until yesterday, it appeared that a bailout plan for Chinese stainless steel titan Tsingshan Holding Group owned by “Big Shot" Xiang Guangda (and which was facing an $8 billion nickel margin call following the explosive surge in Nickel prices which briefly soared above $100,000/ton up 4x in just a few days, or would be if the Hong Kong-owned LME ever reopened Nickel trading) was coming along with the support of the largest US commercial bank, JPMorgan, and one of China's largest banks, China Construction Bank, both of which would provide credit guarantees to the distressed producer (as we reported in "JPMorgan Bails Out Chinese Nickel Giant Facing Billions In Losses From Record Margin Call"). However, that rapidly cobbled-together rescue plan (which saw meetings running into the pre-dawn hours of Wednesday morning) took a major detour yesterday when Xiang announced that he intends to keep shorting nickel, as he thinks the price will drop eventually but raising the risk that the margin call will only get worse as buyers of nickel swarm the offer and inflict even more pain on the Chinese tycoon.

By way of quick background for those who have missed one of the most dramatic moments in metals market history, Tsingshan - which under the leadership of Xiang has emerged from obscurity to become the world’s biggest producer of nickel and also stainless steel - has struggled to meet margin calls as the price of nickel on the LME exploded higher as a result of an avalanche of short squeezes by producers (who traditionally hedge their physical exposure by shorting futures). As the WSJ reported previously, the total size of the margin call is roughly $8 billion, resulting from a short of some 150,000 tonnes of nickel; the company had started to amass its short position at the back end of last year when prices started to pick up because of demand from carmakers.

So as banks in the "rescue syndicate" perhaps got cold feet about their continued involvement in what may ultimately end up being an even bigger bail out, this morning the FT reported that none other than China itself was exploring a plan to rescue the billionaire owner of Tsingshan - which is China's largest stainless steel producer and is thus systematically important for Beijing.

According to the FT, one option being considered is for Tsingshan to swap some of the lower grade nickel it produces -  which does not meet the LME’s quality standards - for refined metal held in China’s State Reserves Bureau. Tsingshan could then deliver the high-grade metal against its contract on the LME, pay off its brokers and close its lossmaking position.

But a wrinkle has emerged: as the FT reports, Chinese officials and the LME both want Tsingshan to pay its brokers, who are also facing large trading losses, and then exit its position. That will allow the market to reopen in a more orderly fashion. Another potential pathway is for Tsingshan to sell some of its low-grade metal and use the proceeds to settle with its brokers.

But all that was thrown in disarray yesterday when, as Bloomberg first reported, Xiang refuses to unwind his position and wants to keep his short positions in place, meaning that he would be at risk of an even bigger margin call should the price of nickel rise further.

Meanwhile, the LME which initially had said it would reopen nickel trading today, kept the market halted out of fears of displeasing Beijing and defaulting the country's largest stainless steel producer. The LME has not said when nickel trading will resume. It said on Thursday that a plan to match long and short positions before the market reopens had received a mixed response.

So what happens next? Well, we reported previously Tsingshan has secured credit promises from several banks - including JPMorgan - that would give the company the ability to withstand further margin calls when the market reopens. According to the FT, Tsingshan could also use an agreement with China's State Reserves Bureau (SRB) "to send a powerful message to the market about its ability to stay in its position without being squeezed."

Meanwhile, as we wait to see what form the bailout will take, and whether Tsingshan will be forced to pay out on its margin call or will somehow be given a pass,  moments ago Bloomberg reported that JPMorgan is the largest counterparty to the nickel trades of the Chinese tycoon.

According to Bloomberg's Jack Farchy, about 50,000 tons, or roughly a third, of Xiang Guangda’s total nickel short position of over 150,000 tons is held through an over-the-counter position with JPMorgan, citing "people familiar with the matter".

Based on that figure, Tsingshan would have owed JPMorgan over $1 billion in margin on Monday.

That sizable figure, which JPMorgan would be on the hook for if Tsingshan fails, explains why Jamie Dimon's bank is leading discussions between Xiang and roughly 10 banks and brokers through which his nickel short position is held. It also explains why JPMorgan emerged as the US bank that was working alongside Chinese lenders to organize a financial bailout of the steel maker.

Besides JPM, other banks and brokers include BNP Paribas, Standard Chartered, CCB International Holdings, ICBC Standard Bank, United Overseas Bank, DBS Group, BOC International and brokerage Sucden, according to Bloomberg.

For those who are getting a sense of deja vu, that what is taking place in the Nickel market now is reminiscent to Archegos one year ago, when a syndicate of banks had allowed the family office to put on billions in risk exposures via TRS only to pull their funding when they all realized the party was over, you are not too far off: the only difference is that this time, the banks are working hard to help the Archegos of 2022 stay alive, mostly because of the firm's strategic importance to China.

Tsingshan’s difficulty in paying its margin call have put its banks and brokers in a bind, as they have had to make hefty margin calls of their own at the LME to cover their short positions on the exchange. If Tsingshan walks away from its commitments, the banks stand to lose billions of dollars. And now we know that none would lose more than JPM.

Making matters even more complicated, the crisis could still be resolved without losses for Xiang and the banks, as Tsingshan stands to benefit from the increase in prices if it can weather the storm. Meanwhile if Xiang holds on to his short position, as he has told his banks he wants to, and nickel prices go down once the LME reopens, the amount of money he owes his banks and brokers would also drop sharply. The big question of course is whether the price will drop, or if sensing the opportunity of a lifetime, speculators bounce and push the price of Nickel even higher, replicating the Volkswagen melt up squeeze, in the process leading to billions more in variation margin... and losses.

As Bloomberg also reveals, Tsingshan has a short position of about 30,000 tons of nickel directly on the LME, held through brokers CCBI, ICBC Standard Bank and Sucden. The remainder of the over 150,000 ton short position is held through bilateral deals with banks like JPMorgan. Many companies prefer to trade via such “over-the-counter” positions, which mean dealing only with the bank and also are subject to much fewer reporting requirements. The banks in turn generally offset their risk by placing short positions on the LME.

Meanwhile, JPMorgan - the leading bank in global metals trading by far - has the largest single short position on the LME, according to people familiar with the matter. But that position is held for client businesses, and according to Bloomberg "there’s no suggestion that the bank is placing its own short bets on nickel prices."

So as we enter the weekend with no bailout deal still in place and with the LME not giving a clear date of when trading reopens, what happens next is anyone's guess.