Tycoon Whose Bet Broke the Nickel Market Walks Away a Billionaire

By 2 o'clock a.m. On March 8th, it was obvious that the giant bet on a fall in nickel prices was going badly.

His trade was more than $10 billion underwater after his futures traded above $100,000 a ton. It was threatening to cause a Lehman Brothers-like shock through the entire metals industry and potentially topple the London Metal Exchange.

The man was calm. More than 50 bankers showed up at his office to hear how he would respond to the crisis. He said he was confident that they would overcome the problem.

He did.

The nickel price is going down. The banks that were against him have been repaid. According to people who know him, he has closed out nearly all of his short position in nickel, making a loss on the trade of about $1 billion.

The man dubbed the Big Shot in Chinese commodities circles is poised to walk away from the debacle with his multi-billion dollar mining and steelmaking company.

The crisis has left other people dealing with destruction. His escape was thanks in no small part to the actions of the L ME, which halted trading until a deal could be reached with his banks.

The people on the other side of the trade were angry. The nickel market is still reeling after months of investigations and lawsuits by the L ME.

The founder of AQR Capital Management said last week that he was happy to see that JP Morgan and The Big Shot got out of the mess. It's just a warm feeling.

The account of how Xiang extricated himself from the short squeeze is based on many interviews with people who were involved. Attempts to speak to Tsingshan were not successful.

There was a huge short squeeze.

There was a bet that a planned jump in Tsingshan's production this year would cause prices to fall. When Russia invaded Ukraine, nickel rocketed 250% in a single day.

Senior bankers crowded into a room at Tsingshan's headquarters demanding answers. Video calls from London or Singapore were being made by others. Some people didn't leave until the next day.

The crowd that night was so large because he was a good client for many of the banks and brokers. Tsingshan couldn't meet its margin calls after nickel spiked. He owed them a lot of money.

After nickel hit $100,000, the LME halted trading. It canceled billions of dollars of transactions and brought the price back to $48,078, which was a lifesaver for Tsingshan.

Xiang should strike a deal with holders of long positions to close out his trade, according to the L ME. He would have to accept billions of dollars in losses if the price was more than $50,000.

The man is in his 60s. He built Tsingshan into the world's largest nickel and stainless steel producer after starting out making frames for car doors and windows in eastern China. He had a penchant for betting big and was known for his visionary thinking.

When Tsingshan withdrew large amounts of nickel inventories from exchange warehouses and caused prices to jump, he caught the attention of the L ME.

His approach to trading was having a bigger effect.

The trading freeze and spike in prices made it difficult for companies that make nickel products. New orders stopped being taken by some. At least one dealer had to seek financial support from its parent company because they were left scrambling to recover missed margin calls from clients who couldn't pay.

In the early hours of March 9 there was a lot of chaos in the industry. They were more scared than he was.

They would have to take him to court if he refused to pay. It wasn't clear if the banks had the right to seize Tsingshan's most valuable assets.

One person in the room remembered that the bankers understood that if things went wrong they would be out of a job.

The lead was taken by JP Morgan, which had the largest exposure. Many of the banks in the group were from China and Singapore, which had little experience handling such a situation.

There is a personal guarantee.

The bankers were told by Xiang that he had no intentions of closing the position. He delivered the same message a few hours after. He said that Tsingshan was supported by the Chinese government. No one would be able to back down.

He wrote a list of assets that he was willing to put up as security. That wasn't enough for some of the bankers. Due to the Pandemic, they wouldn't be able to do any due diligence on the Indonesian assets for weeks or months.

In Chinese business culture, a personal guarantee is a very important concession. Tsingshan could be evicted from his home if it didn't pay its debts. He was willing to give that. Do you take it or leave it?

It was a foregone conclusion. Tsingshan announced a deal with its banks under which they agreed not to pursue the company for the billions it owed for a period of time. Xiang agreed to reduce his nickel position once prices fell below $30,000.

The market reopened two days later and prices went down. Tsingshan was able to cover 20% of its short position after a brief dip.

The pressure on the L ME was increasing. Regulators launched reviews of governance. The Dallas Federal Reserve and International Monetary Fund joined in a chorus of criticism.

"The moment we realized what was really happening, we felt we could no longer trust the L ME with our clients' money." The open interest in the six main metals fell to the lowest in more than a decade.

Tsingshan and its banks review their standstill agreements every month. The price of nickel hovered around $33,000 after the initial dip.

It was a nerve-racking moment. If sanctions against Russia caused a disruption in nickel supplies, Tsingshan and its banks would still be exposed to large losses.

In May, prices plummeted below the key $30,000 level. In March, Tsingshan had a position of over 150,000 tons.

By this point, prices were below the level at which Tsingshan had stopped being able to pay its margin calls, meaning it no longer owed the banks any money. The personal guarantee was seen as a concession to his financial troubles. The number of nickel plants used as security was reduced but the personal guarantee remained. A spokesman for the bank wouldn't say anything.

It was one of a number of signs that the crisis had hurt his relationship with his banks. As recessionary fears swept global markets in June, Xiang's short position appeared to be a smart trade. He asked his banks for some flexibility to allow him to run the position longer than had been anticipated. By the end of June, he had left his position with several banks and was left with less than 20,000 tons.

Tsingshan lost around $1 billion on the trade, according to people familiar with the situation. The man isn't worried. Over the same period, his nickel operations have made money. The standstill agreement is due to end in July.

Plans for the future at Tsingshan, which had revenues of $56 billion last year, are the focus of Big Shot. He is still able to trade on the Shanghai Futures Exchange despite the fact that his ability to trade on the L ME may be reduced. He wants to expand to Africa as well. A huge increase in production from his plants in Indonesia is one of the key factors driving prices lower.

Regulators have pointed to the chaos in nickel as a sign of the risks in commodity markets, and called for greater oversight. A hedge fund and a trading firm are taking legal action against the L ME.

The nickel market is still broken, say people involved in it, with both open interest and trading volumes stuck at sharply lower levels. Less than 25% of global nickel output is being sold on the basis of LME prices, according to Jim Lennon, a veteran nickel market-watcher.

He says that a lot of the industry has stopped using the L ME. The market is still working.