<aside> 💡 Here we highlight 1) A comprehensive analysis of 2022 Nickel Crisis and 2) What it reveals about the commodities market
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The concept of spontaneous order—the natural emergence of order from individual actions without central planning—has been lauded for its efficiency in various domains. However, when applied to the commodities market, it reveals significant flaws. The 2022 nickel crisis on the London Metal Exchange (LME) serves as a stark example of these flaws and how they can lead to market chaos.
The commodities market is structurally decentralized, with numerous players operating independently. This decentralization can lead to inefficiencies and missed opportunities for optimal resource allocation. The nickel crisis highlighted this issue, as the LME struggled to manage the market without a robust global coordination layer for both value and information. The crisis was triggered by a massive short squeeze centered on Chinese tycoon Xiang Guangda's company, Tsingshan Holding Group Co., which had amassed a large short position in nickel[1][2]. The lack of coordination and oversight allowed this position to go unnoticed until it was too late, leading to a price surge of over 250% in just a few days[3]. This chaotic price movement was akin to a symphony where each musician plays their part flawlessly, but without a conductor, the harmony is lost. Similarly, the commodities market struggles without a central coordinating mechanism to ensure that all participants are aligned and aware of significant market positions.
The commodities market operates in a permissioned arena, where only selected participants can engage fully. This restricted access not only stifles competition but also perpetuates the dominance of established players. The nickel crisis demonstrated how this exclusivity can lead to market instability. The LME's decision to cancel trades during the crisis was criticized for unfairly penalizing investors who had traded in good faith, further exacerbating the dominance of established players like Tsingshan[1][2]. This exclusivity undermines the principles of free market competition and innovation, creating an environment where only a few hold the keys to the gate, akin to an exclusive club.
Deep information asymmetry plagues the commodities market. In a perfect world, all participants would have equal access to information, enabling fair competition. However, the reality is more like a poker game where some players have seen the cards in advance. The nickel crisis highlighted this imbalance, as the LME was unaware of Tsingshan's large short position until it was too late[2]. This lack of transparency allowed Tsingshan to accumulate a massive position without the LME's knowledge, leading to a short squeeze that caught many market participants off guard. The report on the nickel crisis noted that the LME's failure to understand and police large positions in the nickel market was a significant shortcoming[1]. This imbalance leads to unfair advantages and market distortions, making the spontaneous order more chaotic than organized.
The 2022 nickel crisis on the LME serves as a stark example of the flaws in the spontaneous order of the commodities market. The lack of a global coordination layer, restricted access, and deep information asymmetry all contributed to the chaos and instability seen during the crisis. Addressing these flaws is crucial for creating a more equitable and efficient commodities market. The LME has acknowledged these shortcomings and is working to implement reforms, including tougher oversight of the over-the-counter market, harsher position limits, and stronger requirements for clearing members[1]. These measures aim to prevent similar crises in the future and ensure that the commodities market operates in a more transparent and coordinated manner.