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The hunt for clues begins with a kick


(Bloomberg) — The revelation that around $2 million in “nickel” on the London Metal Exchange were actually just bags of ice has made headlines across the sprawling network of warehouses and metal storage facilities that underpin it. for billions of dollars in derivatives traded daily on this metal exchange. LME.

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Over the past week, warehouse workers from Busan in South Korea to Genoa in Italy have rushed to test tens of thousands of two-ton bags of nickel — in some cases, by literally kicking them.

The LME advises warehouse operators to wear steel-toed boots for safety, said one person who received the instructions. Rule of thumb: If you kick it and it hurts, it’s probably nickel.

The batch inspection, which also includes more carefully calibrated checks such as weighing and scanning bags, comes after the LME last week announced it had discovered “anomalies” in nine nickel contracts. . Bloomberg reported that the contracts – now void – belonging to JPMorgan Chase & Co. No other issues were found on LME’s global network of warehouses, the exchange said on Thursday.

Attention will now turn to the question of how bags of ice can be bought and sold as nickel on the LME – long seen by traders as the only place where they don’t need to second guess. inside your goods.

The first sign of trouble came after two trading companies, Trafigura Group and Stratton Metals, bought from a warehouse registered with the LME in Rotterdam. When the bags were delivered, their weight did not match the papers. Inside, instead of nickel briquettes – which look like lumps of coal for a barbecue – the bags have ice instead.

When the remains of the Rotterdam warehouse were searched, bags were also found in nine JPMorgan LME contracts containing ice.

There are two possible explanations: either the bags were filled with ice when they were first delivered to Access World’s Rotterdam warehouse, or someone snuck into the warehouse to steal the nickel.

Read: LME rocked by new nickel scandal after ice bag found

Access World is leaning towards the second hypothesis, according to people familiar with the matter, because it has a record of material being weighed when it first enters the warehouse.

This isn’t the first time the metal industry has had to deal with scandals and thefts, and nickel’s high value makes it a favorite among scammers. Just last month, Trafigura said it was the victim of a “systematic fraud” whereby it spent about $600 million on shipments of nickel that turned out to be free of the metal. (Trafigura has said that the LME story is unrelated to their legal case over fraud allegations.) In 2017, banks lost more than $300 million after discovering fake warehouse receipts for nickel that were issued hosted in an Access World repository in Asia — in that case, outside of the LME’s network.

Metal traders joke about how the oldest known written complaint – on a clay plate housed in the British Museum – details a false deal for copper that fails standard.

But in today’s world, the LME’s system is where metals are said to be unquestionably safe. The exchange’s contracts, which are the global standard for industrial metals like copper, nickel and zinc, are backed by physical metals in a network of warehouses around the world.

While the majority of exchanges on exchanges are purely financial transactions involving hedge funds looking to bet on metal prices or producers looking to hedge risk, any Anyone with an expired contract receives a metal parcel in the LME’s registered warehouse. The entire system relies on warehouse companies to attest to the metal they have loaded when they issue an LME “certificate” – a warehouse receipt that can be delivered under an LME contract.

Simon Collins, former head of metals at Trafigura and CEO of digital trading platform TradeCloud, said: “Rising base metal prices make them a natural target for fraud and fraud. theft. “Commodity companies need to protect themselves through rigorous processes of people, processes and technology.”

Access World said it believes the nine orders suspended by the LME are an isolated case, “specific to a warehouse in Rotterdam.” A promotional video for the company’s facility in the port area of ​​Rotterdam shows a brightly lit warehouse filled with stacks of shiny metal, as well as numerous security cameras.

Read: JPMorgan Owns LME ‘Nickel’ Actually Bags of Ice

A headache for investigators is that it’s unclear when any of the nefarious activity took place: the material was first shipped to the Rotterdam warehouse several years ago, according to people familiar with the matter. This.

It may have gone undetected for years, because of a unique feature of the nickel market. Unlike aluminum and copper, which are stored in neat stacks in storage, most of the nickel in LME is in the form of briquettes in bags. Warehousing and shipping companies usually don’t look inside the bags, only checking to see if the seals have been tampered with. They issue stock receipts on a so-called “supposedly contained” basis – meaning they cannot vouch for the content.

The number of bags with the problem is small, affecting only a few tens of tons of nickel. But news that only some of the LME’s nickel contracts had been compromised prompted traders to reconsider the assumption that the LME-registered metal was always perfectly safe.

Spot nickel prices fell to the biggest discount on three-month futures in 15 years this week, a sign that some traders are suddenly wary of taking LME nickel contracts.

For the LME, the warehouse problem is yet another headache as it weathers the aftermath of the last nickel crisis a year ago. It also comes as the exchange is finally gearing up to resume regular trading hours in nickel – currently scheduled for Monday – when markets will open on Asian day for the first time since early March. 2022.

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