The Nickel Mines Ltd (ASX: NIC) share price is faltering once again today and is now deep in the red at $1.20.
That's a further 15% decline today, which means its shares are now down by 25% since last Friday's close. That comes despite the spot price of nickel soaring almost 145% in the past five days (shown below).
What on earth is going on?
Sanctions on Russian exports has commodity traders in a scurry trying to evaluate their next moves and position themselves for the volatility.
Russia is the world's largest exporter of nickel, an industrial metal that had seen its value surge due to heightened demand for lithium-ion batteries. Nickel is a key component in the cathode of these batteries, and is thus essential for electric vehicle production, but is also used in stainless steel production.
Nickel futures soared to US$100,000 per tonne this week amid the nerves prompting the London Metals Exchange (LME) to suspend trading to avoid an all-out disaster, as fears of supply shock radiate throughout markets.
However, market data soon emerged showing that Chinese nickel and steel giant Tsingshan and its subsidiary, Shanghai Decent, may have been largely behind the upswing.
As The Motley Fool reported yesterday: "Tsingshan and the affiliate were recently caught out holding an enormous short position on nickel futures which has obviously backfired spectacularly in the last few days.
"There are reports that coverage of this short position is what may have helped propel nickel so high."
Basically, the commodity group was forced to play its hand in order to avoid a huge margin call and from becoming insolvent, as the 200,000 tonne short position on nickel, printed at US$21,000/tonne, spectacularly backfired.
Large commodity producers will hedge their exposure to the product using futures to protect against large swings in prices.
Going short on nickel futures meant Tsingshan was trying to protect its inventory value by 'locking in' a price in which the company could sell its product at a future date.
The scenario is, if nickel prices plummeted too far below US$21,000/tonne, Tsingshan and Shanghai Direct could still sell their product above the market price – at US$21,000, to be exact.
However, with the unprecedented "black swan" event via conflict in Europe, the simple mechanics of supply and demand shot prices north, meaning Tsingshan and co were left out in the rain, so to speak.
The result was a snowball effect from complex derivatives positions that ultimately shored up huge losses for the firm, propelling nickel spot to triple in value on Wednesday.
At the close of trade, the mark-to-market accounting that exchanges use in daily settlements showed the company was up for more than US$7 billion.
Why is the Nickel Mines share price struggling?
Even before the unfathomed spike, nickel futures had reached US$25,233/tonne, up 46% from US$17,232/tonne at the end of April 2021.
Now it is up more than 200% for the year and traders still have no idea what will happen with global inventories and the pull-through from failed deliveries.
One might think the huge jump in nickel prices would be a net positive for specialists involved with the metal. Not Nickel Mines though.
It has suffered huge losses on the day and was even forced to pause trading yesterday following the jitters.
The reason is because Shanghai Direct is the company's biggest shareholder, with an 18% stake, and also partners with Nickel Mines on two of its nickel pig iron operations.
The company affirmed this in an announcement yesterday that tried to dampen investors' reaction to any potential ripple effect.
Management assured investors all deal covenants remain in place and there should be no fallout from the events.
It doesn't appear to have worked – investors are offloading shares at pace today such that trading volume is 300% above its four-week average in today's session.
As the divergence between Nickel Mines' share price and the price of Nickel continues to widen today (as shown below), could this be a potential value gap? Analysts at Bell Potter think so.
The broker noted the dislocation between fundamentals (nickel price) and the company's current valuation – which is now trading at a significant discount – could be a buying opportunity in a note today.
The Nickel Mines share price has collapsed around 11% over the past 12 months. It is also down almost 16% this year to date and 17% over the past month.
