The LME has little choice but to tinker if it wants to stay in business. Stocks of available nickel in LME warehouses no longer represent weeks or days of consumption but hours. The “shorts”, investors who sell metal they don’t own in the expectation that the price will fall, are in dire straits — they cannot deliver the metal they owe. The price has soared to almost three times the long-term benchmark of just over $9,000 a tonne and people are talking darkly about a squeeze, about hidden stockpiles.

Without stocks, the LME’s forward nickel contracts would have no underpinning and the exchange would have to suspend trading. But the fundamental question that is being asked is whether these commodity exchanges are merely reflecting physical supply and demand or creating their own reality. Outside the LME, nickel is widely available, albeit at a premium to the LME’s inflated price. Is the tail beginning to wag the dog?

Nickel is an important metal, used to make stainless steel, but it is not a huge market. Global demand is about 1.3 million tonnes annually, growing at rates of 5 per cent, and China accounts for almost all of the growth. Meanwile, supplies are tight and a strike at a mine in Labrador is exacerbating the constraint on supply.

That would explain a tight market but not the LME’s empty warehouses and the sudden fear that the forward market might disappear. It has escaped no one that the metal shortage has occurred at the same time as a complex takeover battle swirls over the second-largest nickel producer Those betting on an outcome to that contest might have an interest in where the price of nickel goes.

Metal markets are plagued by manipulation attempts, such as the Sumitomo copper scandal. More recently, a large short position in copper amassed by an official Chinese agency created a frenzy of speculation. It is easy for big producers or consumers to create a temporary famine or glut by quietly shifting their own stock position.

Is it the LME’s job to rescue a “short” from losing his shirt to a more powerful “long”? For the LME, the potential embarrassment of a default is growing because pension funds are now taking bets on these formerly obscure commodities.

If the LME’s strange little world is becoming more visible, perhaps the answer is more visibility from investors. If there is a big stock of nickel hiding out there, should we not be told?

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