The discovery that $1.3 million worth of nickel kept in a warehouse in the Netherlands was actually just bags of stones has renewed scrutiny of the London Metal Exchange (LME), one of the world’s oldest marketplaces for non-ferrous metals. The fraudulent nickel, found in a warehouse in the port of Rotterdam operated by Access World, a Swiss-based commodities operating company, was meant to be underpinning contracts for JPMorgan Chase & Co.
Although the relative impact was small ($1.3 million represents just 0.14% of live nickel inventories on the LME), the incident has raised concerns about the exchange’s credibility.
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Nickel is a popular medium for scammers because of its high value and relatively low level of regulation, given that base metals are subject to less oversight than precious metals.
The news comes just weeks after the LME announced it was being investigated by the British financial regulator for its reaction to the price of nickel surging by as much as 250% in just 24 hours last March. The UK’s Financial Conduct Authority is examining the exchange’s controversial decision to suspend trading and void all purchases made during that window–worth about $4 billion–citing worries about external forces and artificial market volatility.
BHP—the largest mining company in the world—called for an LME overhaul in an economic outlook report released last month, saying that “reform of the LME’s metal delivery rules was long overdue.”
Is the LME behind the times?
A major issue for the LME is its inability to trade nickel mined by a new extraction technology used by Chinese miners in Indonesia, the planet’s biggest nickel producer.
Chinese companies have developed a technique called high-pressure acid leaching that makes low-quality nickel usable in lithium-ion batteries. While an expensive process, it significantly expands the amount of nickel available for battery production.
However, this type of nickel can’t currently be delivered against the LME contract. In a written statement provided to the Financial Times, the LME acknowledged falling behind structural shifts in the market.
“Our current focus is on rebuilding liquidity in our Class1 [high-purity] nickel contract and we continue to explore ways in which we might enhance the contract specifications,” a representative for the company said.
Jeremy Weir, head of commodities trading giant Trafigura, told the Financial Times at an industry summit in Switzerland that the LME isn’t capable of handling the increased demand for base metals spurred by the quickly growing battery market.
“The battery market is now the largest part of the industry, therefore the LME contract does not necessarily reflect the underlying [structure] of a large part of the industry,” Weir said. “We have to have the contract or contracts to reflect the underlying business, and we’ve just seen a major change.”
Trafigura wants its nickel back
Trafigura has had his own share of problems with fraud outside of the LME. Last month, the company revealed that it had lost more than half a billion dollars after discovering fraudulent nickel deliveries. Trafigura inspectors found low-quality metals, also in Rotterdam, in place of expected nickel.
“Since late December 2022, a small proportion of the containers purchased from these companies have been inspected as they reached their destination, and were found not to contain nickel,” Trafigura said in the statement. “The majority of the shipments remain in transit awaiting further inspection.”
The company responded by suing Indian businessman Prateek Gupta, as well as several companies connected to him, accusing Gupta of systemic fraud in nickel purchases. Trafigura’s head of nickel and cobalt trading, Socrates Economou, also announced he would depart.
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