London 01/05/2015 - The Shanghai Futures Exchange (SHFE) is reviewing the listing application of several foreign nickel cathode brands for delivery against its new contract, but a dispute over the terms of the registration for Norilsk Nickel, a key importer into China, has prompted delays and raised concerns over settlement liquidity.
SHFE is asking Norilsk to accept a discounted price to Chinese brands before it can be approved for delivery against the contract launched in March, a condition that has been rejected by the Russian producer, FastMarkets understands.
Norilsk Nickel declined to comment and SHFE was not immediately available for comment.
SHFE states that nickel full-plate cathodes approved for delivery should have no less than 99.96 percent of total nickel and cobalt content. Alternatively, it also accepts brands with either no less than 99.99 percent of nickel and cobalt content or no less than 99.8 percent of nickel content - the latter being the same specifications than those applied by the London Metal Exchange (LME).
So far only six Chinese producers including Jinchuan are registered for physical delivery.
SHFE argues that although Norilsk Nickel's cathodes comply with required specifications in terms of nickel content, their appearance don't because the surface is not smooth enough compared with brands like Jinchuan, and so the producer should accept an official discount price in the range of $100-150 per tonne, according to several sources.
Norilsk views these terms as unacceptable and argues that its cathodes are at least as good as Jinchuan's, FastMarkets understands.
"It is just an excuse for SHFE to say the surface is not smooth enough - their real intention is for Norilsk to accept a discount price," a trader in China said.
"[This nickel] needs to undergo some process to be accepted. Usually, cathodes are required to be tested by a big steel mill, then they do a test assessment report and SHFE decides," said another nickel trader in Shanghai.
Meanwhile, other foreign brands have also applied for registration against the new SHFE contracts, including Glencore Nikkelverk AS and Sumitomo Metal Mining Co., several sources said.
"Their nickel cathodes have met the standards set by SHFE such as the purity of nickel content and the smoothness of the surface. It will just be a matter of time for SHFE to accept them as they need the liquidity," said a third trading source.
Trading volumes on SHFE have increased sharply recently but, with Norilsk Nickel and other foreign brands still not registered for delivery, there are concerns that settlement could become an issue when the main July prompt date comes in play - the expiry date is July 15.
"No Western brands are approved yet and the Chinese are not delivering enough to cover short positions, so the July prompt date could be interesting," a trader in Europe said.
Most sources believe that SHFE will come up with a plan to solve the liquidity problem before July 15 to avoid extreme volatility and make sure it provides proper hedging tools for the industry.
"Trading to date is purely speculative, so I don't expect anyone will want to take delivery," another source in Europe said.
"But the shorts will have to either deliver, buy back or borrow, that could be very interesting to see what happens then as the positions are quite large. If the shorts, as I suspect, are speculators and not producers, they will not be able to deliver which will make for some interesting times ahead,” said an industry source in Europe.
Nickel for July delivery was last at $17,099 (106,010 yuan) per tonne on SHFE with an open interest of 125,970 lots. On the LME, three-month nickel was last traded at $13,745 per tonne.
Nickel is also traded on the privately-owned Wuxi Stainless Steel Exchange, where both Norilsk nickel and Glencore Nikkelverk AS are registered for delivery.
On April 30, Jinchuan nickel was traded at a premium of 1,800 yuan ($290) per tonne for the June contract on Wuxi while Norilsk Nickel was at a discount of 700 yuan ($113) - this is because Jinchuan material availability is tight at present and the brand is used for delivery on both exchanges as opposed to Norilsk's.
The price on Wuxi is lower than on SHFE with a differential reaching 5,000 yuan ($809) per tonne this week, noted a trading source in China, attributing the gap to the lack of overseas brands listed on SHFE.
(Additional reporting by Perrine Faye. Editing by Tom Jennemann)