Talk of the Town
Last week, as China’s leading stainless steel and nickel producer Tsingshan reached a “standstill” agreement with a consortium of major international banks, the temporary fix to allow stakeholders to figure out a solution after a dramatic few weeks on the London Metal Exchange (LME) almost wiped out multiple years of Tsingshan’s profits.
The saga, which has reportedly involved policy makers in Beijing and the National Strategic Reserve Administration, has triggered conversations within China about the risk management of industry champions spearheading China’s “Going Out” strategy and how to avoid similar incidents that have, in the past, crippled ambitious Chinese commodity players.
At the most tense moment of the incident, Tsingshan’s short position on nickel, which it built up in 2021 as a hedge against future price drops, faced a USD8 billion margin call as nickel prices saw a whopping 400% rise in a matter of days to USD100,000/ton. On March 8 the LME took the dramatic step of suspending nickel trading, citing “disorder” in the market. The company’s 2020 net profit was around USD800 million.
The difficulty faced in paying margin call has exposed Tsingshan’s financiers and brokers to huge financial risks. That has resulted in a bank consortium, led by JPMorgan, trying to come up with bailout plans, which, according to media reports, would involve credit promises for Tsingshan to withstand further margin calls. There were also reports about potential support from the National Strategic Reserve Administration, China’s state reserve of strategic commodities from food to metals, of high-grade nickel to help Tsingshan deliver on its contract and close its position.
For Chinese observers of the incident, Tsingshan’s margin call scare is reminiscent of earlier short squeeze traumas. In 1997, Zhuzhou Smelting, then China’s leading lead and zinc producer, was crippled by the margin call on its position shorting zinc at LME. The losses fundamentally shook Zhuzhou Smelting into “losing its competitiveness as a producer,” one Chinese expert told Caijing Magazine. In 2005, the National Strategic Reserve Administration itself was faced with a short squeeze on its copper position, leading to RMB900 million in losses and a 7-year prison term for its star trader Liu Qibing.
As a leading investor and builder of massive Chinese metal assets overseas, particularly in Indonesia’s nickel smelting sector, Tsingshan represents a new force on the Belt and Road: private companies with deep pockets and a strategic vision to occupy the commanding heights of the supply chains of critical metals. Tsingshan was among the top 5 Chinese BRI investors in 2021, surpassing major SOEs such as China Three Gorges. Its balance sheet is also intricately connected with a cohort of Chinese metal and mining players such as Huayou Cobalt and Shengtun Mining.
The incident reminded Chinese observers - and presumably policy makers too - of the vulnerability of such industry champions who might see their leadership position, painstakingly built over the years, collapse overnight due to volatilities in the commodity market. Some commentators blamed the situation on Tsingshan’s excessive risk-taking and its indiscretion in exposing details of its position to counterparties. Others highlighted the information and talent disadvantages Chinese players face in the global market. But as the bailout plan and Beijing’s possible intervention emerged, one of the lasting implications of this incident might be the rise of a new type of too-big-to-fail, systematically critical companies for China.
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