By Pratima Desai and Eric Onstad
LONDON (Reuters) - Nickel volumes on the London Metal Exchange plummeted in April because commodity funds and other participants abandoned the metal after a meltdown in March left the market in limbo for more than a week.
Benchmark nickel prices on the exchange doubled to a record above $100,000 a tonne within hours on March 8 on expectations China's Tsingshan Holding Group and others would have to buy back their short positions -- bets on lower prices.
To prevent further disorderly trade, the world's largest and oldest metals exchange halted nickel trading and cancelled all trades executed on March 8.
When the nickel market resumed on March 16, technical problems again hampered trade.
"The turmoil eroded a lot of trust in nickel trading," said analyst Daniel Briesemann at Commerzbank.
Some consumers and producers are also avoiding using the exchange because they don't believe nickel prices reflect fundamentals, traders said.
Liquidity as measured by volumes and open interest has dropped significantly.
"It's a vicious cycle. Volumes and liquidity fell, some people stopped trading, which means even lower liquidity and volumes," a source at a commodities fund told Reuters.
Dwindling volumes and open interest means some funds with liquidity thresholds have also stopped trading nickel.
Average daily volume of LME nickel contracts slid 28% in April to 41,431 lots or nearly 250,000 tonnes compared with the same month last year, the lowest since July 2012.
This compares with annual rises of more than 20% in January and February.
Graphic: LME Nickel Volumes Collapse After March Chaos - https://graphics.reuters.com/NICKEL-LME/FUNDS/zdvxowgxzpx/chart.png
Open interest -- the number of outstanding contracts that have not been settled -- also dropped to 10-year lows of 160,528 lots or more than 960,000 tonnes last week, down 28% since March 16.
"We are not currently trading nickel," the source at the commodity fund said. "The market has to prove itself to someone in our position and we are a proxy for a variety of people's position as to whether they participate."
Low liquidity also makes it difficult to execute large trades without causing major price moves.
"If you had to buy or sell several hundred lots, you'd move the price thousands of dollars," an executive at a metals trading firm said.
The LME is owned by Hong Kong Exchanges and Clearing Ltd.
(Reporting by Pratima Desai and Eric Onstad; editing by Jason Neely)