By Yusuf Khan

The London Metal Exchange has outlined plans to overhaul trading of its troubled nickel operation, following a bout of turmoil last year, including the introduction of a new contract that better reflects the metal's growing role in electric vehicles.

The LME, the de facto home of metals trading globally, said Thursday that it is implementing a series of changes on the platform designed to "strengthen and enhance its markets" after it came under fire for the way it handled trading operations for its nickel contract after a short squeeze led to prices skyrocketing to more than $100,000 a metric ton in March of last year.

The changes include more forms of nickel, such as coarse nickel powder, being made deliverable against current contracts, as well as a new spot-nickel trading contract in China designed for materials specifically used in batteries, working with its China-based partner Qianhai Mercantile Exchange.

The exchange also said it remains open to introducing class-two contracts, which cover materials such as nickel sulfate, as the market becomes less dominated by stainless-steel-driven trading and battery demand rises.

Additionally, temporary limits to daily price movements are being made permanent. Copper and aluminum, for example, will have daily price-movement limits of 12%.

Late last year, nickel prices experienced jolts of volatility, rising and falling by more than 5% in a single day as battery makers looked to hedge on the LME nickel contract for goods such nickel sulfate and nickel matte. Traditionally, what is known as class-one nickel has dominated nickel trading because of its use in stainless steel, but with the growth in battery demand, buyers have been calling for methods to trade and hedge alternative nickel materials.

The move from the exchange comes after recommendations from a report by U.S. consulting firm Oliver Wyman in January, which at the time recommended the LME bolster oversight of trades that take place outside its trading systems and strengthen controls to stop extreme price moves taking place.

Over the last year, the exchange has come under scrutiny from market players, including two separate firms taking legal action for the way in which it handled operations in March 2022. The U.K's Financial Conduct Authority is also conducting a probe into the exchange over the nickel blowout.

The LME has said it would cooperate fully with the FCA and continue to take steps to strengthen the oversight and functioning of its markets.

Last spring, LME nickel prices surged to $100,000 a ton over the course of three trading days, after Chinese metal giant Tsingshan Holding Group Co. had amassed a large short position for nickel, and when prices started rising it wasn't able to deliver against those contracts. In response, the exchange halted trading and canceled trades that took place as it sought to prevent the collapse of brokers.

The LME will also be undertaking a further consultation in May this year as it looks to address the current low levels of stock in LME warehouses. This could include the possibility of taking action to limit backwardation--when futures set for delivery in the near term are more expensive than prices linked to contracts that expire in several months--and a deferred delivery mechanism being made permanent. It is also considering off-warrant stock reporting, where metal sitting in LME-warehouses eligible to be warranted but has not been so is reported on monthly.

Write to Yusuf Khan at yusuf.khan@wsj.com

(END) Dow Jones Newswires

March 31, 2023 07:29 ET (11:29 GMT)