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Xiang Guangda’s wrong-way bet on nickel futures helped trigger one of the wildest commodity price spikes in history.

Now the Chinese tycoon known as “Big Shot” must decide whether to unwind a wager that risks fueling more dramatic swings in one of the world’s most prized metals.

Massive short positions held by Xiang’s Tsingshan Holding Group Co., the world’s largest nickel producer, have gone disastrously awry over the past few days. As Russia’s invasion of Ukraine pushed up prices, short-position holders — including Tsingshan — scrambled to trim their bets. Those moves sent nickel to a record high of more than $100,000 a ton on Tuesday before trading was suspended.

Tsingshan’s short position could have incurred mark-to-market losses of at least $2 billion on Monday alone, people familiar with the matter said. Including positions on the London Metal Exchange and bilateral bets with banks, Xiang still has short holdings in the region of 150,000 tons, the people said.

If it can weather the current storm, Tsingshan – which recorded more than $40 billion in annual revenue over the past two years – should be a prime beneficiary of higher nickel prices as the world’s top producer. In the short term, a package of loans from Chinese and international banks will help Tsingshan meet its immediate liquidity squeeze.

But Xiang must now decide what to do with those positions, which give him outsize influence on the price of a metal used in everything from electric-vehicle batteries to stainless-steel kitchen appliances. 

Xiang has told his banks and brokers that he still thinks the nickel price will fall and wants to keep his short position, Bloomberg reported on Thursday, citing people familiar with the matter.

Despite the recent upheaval, his company still remains the biggest in the nickel industry. Tsingshan has recently threatened in Chinese domestic media to deliver physical metal to the LME, a strong-arm tactic that analysts say would push prices back down.

Related Article: Nickel price spike “purely financial” but Tsingshan effect could linger

Opaque market

How Xiang got to this point is a story that encompasses China’s emergence as a global economic behemoth. It also highlights the risks of an opaque market where a handful of players play outsized roles, deciding how and where purchasers like global battery makers secure raw materials.

Born in 1958, Xiang founded his business more than 30 years ago as a workshop making frames for car doors and windows in Wenzhou, eastern China. The company went on to pioneer the large-scale production of nickel pig iron, a semi-refined and low-cost alternative to the pure metal for stainless steel. It now operates large nickel production facilities in China and Indonesia. 

Tsingshan started building its short position last year in part because Xiang expected a nascent surge in nickel prices to fade, according to people familiar with the matter.

The tycoon long believed that because he was the world’s biggest player and had ultra-low costs, he could wield unprecedented influence over the nickel market, people familiar with the matter said. When prices rose above $20,000 he would consider shorting nickel, the people said, because his production costs in Indonesia were as low as $10,000 a ton. 

Xiang was aware of flaws in his strategy, people familiar with the matter said. Tsingshan’s nickel doesn’t match the grade used in settlement on the LME, so the contracts aren’t a perfect hedge. However, Xiang believed the risks to be manageable, the people said, even as an unidentified nickel stockpiler controlled at least half of the inventories on the exchange. Trading and mining giant Glencore Plc was the dominant holder of nickel in recent months, according to people familiar with the matter. A Glencore spokesman declined to comment. 

Then came a geopolitical crisis that caught him unawares. 

Nickel prices had been rising for weeks, amid fears that supplies from Russia – the largest exporter of refined nickel – would be disrupted if the country invaded Ukraine. 

But much of China’s academic and business community did not believe Russia would attack its neighbor. Xiang himself had little interest in international news, the people said, and the growing speculation over a possible war was hard to track in China. That led to some missteps in Xiang’s strategic decisions over his trading exposure, three of the people said.

Earlier this week, nickel prices in London spiked by as much as 250% in little more than 24 hours. The LME suspended nickel-market trading on Tuesday and the Shanghai Futures Exchange followed suit a day later, after prices on China’s top commodities bourse hit their daily upward limit. 

Risks unclear

Some traders and bankers have questioned whether a producer like Tsingshan, which has relatively low production costs and is active in all parts of the supply chain, really needs such a large hedging position. Major international companies like BHP Group Ltd. and Rio Tinto Plc hedge against currencies, commodity prices and interest rates on an “as required” basis.

But while the short squeeze has weighed on Tsingshan’s short-term cash flows, strong nickel prices are to its advantage in the long run.

Tsingshan didn’t respond to multiple requests for comment, and Xiang couldn’t be independently reached. He blamed “foreigners making some moves” for nickel’s price spike in an interview with Chinese news outlet Yicai.

It’s still unclear how much of a risk the nickel rally and a cash drain from topping up margin payments pose to the company.

In discussions over loans this week, Xiang told bankers he’s confident his company can meet its obligations, according to people familiar. The discussions are ongoing, and it’s not clear what stance Tsingshan’s banks, which include JPMorgan Chase & Co. and China Construction Bank Corp., will take.

(With assistance from Jack Farchy)