One Chinese Tycoon Will Be Feeling Nickel’s Historic Short Squeeze In The Morning

One Chinese Tycoon Will Be Feeling Nickel’s Historic Short Squeeze In The Morning
Stéphane Renevier, CFA

almost 2 years ago3 mins

Mentioned in story

Nope, that’s not a glitch on the chart: a ton of nickel would’ve cost you $25,000 at the beginning of the month, but it gained 250% yesterday to hit an all-time high of $100,000. And it wasn’t a case of a massive imbalance of supply and demand: it was a textbook short squeeze.

You might already know what a short squeeze is, especially if you paid attention to the GameStop saga last year. But if you don’t, first a refresher on the “short” part: a short-seller borrows an asset from an owner for a fee and sells it on the market, hoping to profit by later on buying it back at a lower price. It’s effectively a bet against the asset’s performance.

Now for the “squeeze”. If that asset’s price continues to rise, a short-seller is left with two choices: either pay more in collateral to keep their position open (a “margin call”), or – if they can’t pay – close their bet at a loss by buying back the asset. But the latter’s often easier said than done: buyers who get wise to the short-seller’s predicament might start buying in, hoping to profit when the short-seller reverses their position. That limits the supply of the asset, which pushes up the price until someone is willing to sell as much as the short-seller needs to close their bet. And since there’s no telling what price that’ll be, a short-seller’s loss is theoretically infinite.

That brings us to nickel. The price of nickel started rallying a couple of weeks ago, when it became clear that tensions with Russia – the world’s third-biggest producer – could disrupt the supply of the industrial metal. That wasn’t good news for one Chinese tycoon: the aptly nicknamed “Big Shot” has had a massive short position for months, with some reports saying that his order was even bigger than all the inventory available. So when nickel’s price kept rising, astute traders realized that the tycoon might be forced to close his position and drive the price of nickel up. That led them to aggressively buy nickel, sending prices to the moon and leaving the squeezed short-seller $2 billion out of pocket.

Like the GameStop saga, the exchange suspended trading on the metal and even canceled some trades that were made on Tuesday. That means you can’t currently profit from a potential reversal in prices – arguably a blessing in disguise, given that the short position is so big and the environment so volatile. Still, it’ll be interesting to see the indirect effects from the price move. Nickel is an essential material in electric vehicle batteries, so you could see EV costs surge and EV makers’ profits take a hit. Likewise, you could now see a domino effect of margin calls and potentially even defaults among financial institutions (there are reports that a Chinese bank could already be the first victim).

As for what you can take away from this, there are a few things. First, technical factors can have just as big an impact on an asset’s price as fundamental factors. Second, if you ever go short, you need to be able to handle a pretty badass black swan event. Third, liquidity matters more than you might think. And fourth, exchanges reserve the right to screw you over. Keep those four points in mind: they might come in pretty handy over the next few months…

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