The 2022 Nickel Short Squeeze and LME Trading Halt

On March 8 and 9, 2022, the nickel price spike on the London Metal Exchange exploded 250% in two days as a massive short position was squeezed, triggering an unprecedented trading halt and cancellation of trades that exposed systemic fragility in commodity futures markets.

The Setup: Tencent and Short Dominance

By early March 2022, nickel futures on the London Metal Exchange reflected a market expected to be in surplus: inventories were rising, production was adequate, and prices hovered around $20,000 per metric ton. The market was heavily shorted. Hedge funds and trading firms believed prices would continue falling and had accumulated large short positions—bets that the price would decline.

One major participant was Tencent, a large Chinese nickel producer and trader. Tencent is also a significant short seller of nickel futures and a major holder of the underlying physical nickel. Like any producer, Tencent sometimes hedges against a price rise by buying futures or holding calls. But in this period, Tencent’s behavior differed: it was believed to hold a large short position.

The structure is not uncommon in commodity trading. A producer sells futures to lock in prices or to profit if prices fall. But if prices spike, the producer faces margin calls and potential delivery obligations on contracts it no longer wanted. The vulnerability exists when a producer’s short position is larger than its natural hedging need and when the market lacks enough physical supply to allow orderly covering.

The Squeeze Begins

On March 7, 2022, the nickel market began tightening. Reports surfaced that Tencent was facing acute margin pressures and that Indonesian nickel supplies were constrained. Buyers of futures realized the physical shortage was real: there was not enough available nickel metal to settle all the contracts written against it.

In a normal market, short sellers can cover by buying contracts from other sellers or by acquiring physical metal. But when demand suddenly shifts to covering shorts and physical supply dries up, prices spike. Buyers bid higher and higher to force shorts to sell or to acquire metal from existing holders.

On March 8, nickel prices ripped upward. The exchange raised position limits—the maximum number of contracts a trader can hold—which is a red flag signal that something is breaking. On March 9, the move accelerated. Nickel futures soared from approximately $30,000 to $101,000 per metric ton. Leverage amplified the move: a trader with a 10:1 leverage ratio saw a 250% move translate to losses approaching its entire position.

The LME Response

The London Metal Exchange, which had operated continuously since 1877, took an extraordinary step. On March 9, midday London time, the LME halted nickel trading. It cancelled all trades executed above $50,000 per metric ton—a retroactive annulment of the most extreme transactions.

This decision was controversial. Cancelling trades after execution violates the cardinal rule of market integrity: a deal is a deal. Traders who had bought nickel at $50,001 expecting to resell at $80,000 found their contracts erased. Conversely, shorts who had sold at $100,000 and were underwater had those trades unwound. The LME was choosing losers and winners after the fact.

The rationale was systemic risk. The LME feared a cascade: as shorts were forced to cover and margin calls soared, clearinghouses and banks faced mounting losses. If large trading houses failed, the contagion could spread to the broader financial system. A coordinated halt and cancellation were seen as less destructive than allowing the squeeze to run to its brutal conclusion.

The LME also imposed new rules: wider trading limits, higher margin requirements, and a lower position limit on individual contracts to prevent future concentrations. It added a cooling-off period where any single-day move above 8% would trigger a two-hour trading pause.

The Role of Leverage and Margin

The squeeze exposed how leverage and thin margins can amplify commodity shocks. Most futures contracts require only 5–10% margin—a trader can control $100,000 of nickel with $5,000 in the account. When prices move 10%, the trader is wiped out.

Tencent’s short position likely had leverage embedded in it through banks and trading finance. A single producer does not usually operate independently; it borrows money, takes loans collateralized by physical nickel, or enters into swaps with banks to hedge risk. When the price of nickel exploded, the collateral value collapsed. Banks faced the choice of calling margin immediately—forcing Tencent to liquidate and exit—or absorbing losses themselves.

The squeeze also revealed counterparty risk. Hedge funds that sold nickel futures were short, meaning they profited if prices fell. But when prices spiked, they faced losses on their contracts and margin calls on their brokers. If a fund was leveraged and did not have cash, it could face forced liquidation. The clearinghouse (LME Clear) guaranteed every trade, so it was exposed if traders failed to pay. This chain of dependencies meant the LME’s decision to halt trading was partly a default-risk mitigation: stopping the squeeze before cascading failures occurred.

Tencent’s Exit and Aftermath

After the LME halted trading and cancelled the most extreme transactions, Tencent faced a reset. The company negotiated with LME and creditors to exit its position at a negotiated level rather than being forced out at market. The exact settlement terms were not fully disclosed, but reports suggested Tencent accepted large losses in exchange for orderly winding down.

The physical nickel market also rebalanced. Prices stabilized in the weeks following the halt—not returning to $20,000, but settling around $25,000–$30,000, reflecting a tighter underlying market than March 6 had suggested. Indonesian production constraints and rising geopolitical tensions (partly related to the Russia-Ukraine conflict, which affected global commodity prices) supported the higher levels.

Losses were absorbed across the financial system. Hedge funds that had been short nickel took major hits. Some trading houses and banks suffered nine-figure losses. The estimated total damage ranged from $2–3 billion, split among various institutional holders of short positions.

Systemic Implications

The nickel squeeze raised several questions about commodity market governance. First, the LME’s decision to cancel trades—while pragmatic—undermined confidence in finality. If trades can be unwound after execution when price moves are deemed “excessive,” what is the definition of excessive? The LME added an 8% trigger, but that is arbitrary. Traders now know that extraordinary moves can be reversed, reducing the market’s integrity.

Second, the squeeze exposed concentration risk. The LME did not publish how large Tencent’s short position was, but market estimates suggest it was 5–10% of the entire open interest. A single actor can be too big to manage. New rules tightened position limits, but critics argue the limits still allow dangerous concentrations.

Third, the event showed that physical commodity supplies can be tight enough to create artificial squeezes. If producers and traders can corner the physical supply—by stockpiling, controlling warehouses, or limiting exports—they can force short-sellers to capitulate. This is legal but creates systemic instability. Since 2022, there has been debate about whether commodity exchanges should require physical settlement (forcing delivery) or allow cash settlement (allowing price to equilibrate without delivery), and whether warehousing should be more transparent.

Fourth, the episode highlighted the role of leverage in a low-interest-rate environment. In 2020–2021, monetary policy was loose, and credit was cheap. Traders financed large positions with borrowed money. When rates rose in 2022 and volatility surged, leverage became dangerous. The nickel squeeze was a canary: other leveraged positions were also vulnerable.

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