BHP Group says reform to LME nickel contract 'long overdue'

LONDON (Reuters) - BHP Group, the world's largest-listed miner, said that the London Metal Exchange's nickel contract does not represent the physical market and reform is "long overdue".

Sliding volumes since a nickel trading fiasco last year, when the LME suspended the market for more than a week, have reinforced the problem on the world's largest and oldest metals forum.

A doubling of LME nickel prices to record highs above $100,000 a tonne on March 8 was triggered by the cutting of large short positions, or bets on lower prices, which led the exchange to cancel all trades for the metal that day.

"Reform of the LME's metal delivery rules is long overdue. The LME short squeeze episode highlighted vulnerabilities that had been building for years," Huw McKay, VP of Market Analysis & Economics at BHP Group said in the company's latest economic and commodity outlook issued on Tuesday in Australia.

An LME spokesperson said in an email that the exchange "recognises the ongoing structural shift" in the nickel market.

"We are committed to working with the industry to ensure that the LME's offering meets the industry's evolving pricing and risk management needs...we continue to explore ways in which we might enhance the contract specifications," the spokesperson said in an email.

A major component of stainless steel, nickel is now also a key material for the electric vehicle industry, where it is used in the cathode component of batteries.

Prior to March 2022, global trade in nickel was typically priced using the LME contract, but concern about the reliability of LME prices has led some producers and consumers to try and find alternatives.

"For now, the reality is that the global price discovery mechanism for this critical building block of the energy transition is not functioning well," McKay said.

"The basic tension is that the exchange where the benchmark price is set has become more removed from what is happening in the physical clearing market – China," McKay added.

(Reporting by Clara Denina, additional reporting by Eric Onstad; Editing by Sharon Singleton)