The Economist - UK (2022-03-19)

68 Finance & economics The Economist March 19th 2022

that Mr Xiang’s firm, Tsingshan, had expo­

sure to short positions on the lmeof about

180,000 tonnes of nickel, which were sup­

posed to benefit if prices went down. They

didn’t,  as  a  short­covering  scramble  for

nickel  briefly  pushed  prices  above

$100,000  a  tonne  on  March  8th,  putting

Tsingshan’s  potential  losses  into  the  bil­

lions of dollars. At that point the lmesus­

pended nickel trading, cancelling all trades

that  took  place  overnight.  When  the  sus­

pension  was  lifted  on  March  16th,  a  sharp

drop in nickel prices forced the lmeto sus­

pend trading again, adding to the chaos. 

Three  big  questions  remain.  How  im­

portant is Tsingshan’s role in the debacle?

Did its troubles provoke interference from

China?  And  has  the  lme bungled  its  re­

sponse? All will be the subject of scrutiny.

In  media  reports,  Tsingshan  has  the

lead  role  in  the  drama.  There  is  debate

about whether its short­selling represent­

ed the normal activity of one of the world’s

largest  nickel  producers  hedging  its  out­

put,  or  a  speculator  making  a  rash  bet.

What appears clear is that the nickel it pro­

duces is not the type of metallic nickel that

is traded on the lme, meaning there was a

mismatch between its shorts and longs. As

its losses increased, its brokers forced it to

provide more cash, or “margin”. The size of

its position meant that they also faced big

margin calls, making it as much their pro­

blem as Tsingshan’s. On March 15th Tsing­

shan said it had reached a standstill agree­

ment with its creditors until it reduces its

positions in an orderly way. 

In  the  market,  rumours  abound  that

China may have influenced the lme’s activ­

ities, partly because Hong Kong Exchanges

and  Clearing  (hkex)  owns  the  exchange,

and also because Tsingshan is strategically

important to the country, because its nick­

el  goes  into  electric­vehicle  batteries.  The

lmedenies receiving pressure from hkex.

It granted extra time on March 7th to ccbi

Global, a Chinese broker for Tsingshan that

is a member of the lme, to raise funds from

its  state­owned  parent,  China  Construc­

tion Bank, to cover margin calls. That may

have  been  a  prudent  thing  to  do.  It  knew

the wealthy bank could provide the funds.

Some  traders  wonder  whether  it  would

have  been  as  tolerant  with  a  non­Chinese

entity.  In  the  aftermath,  Chinese  authori­

ties  are  said  to  have  fought  hard  to  stop

Tsingshan’s  nickel  assets  falling  into  the

hands of non­Chinese speculators. 

The  most  intense  scrutiny  may  fall  on

the lmeitself, specifically the timing of its

decision to suspend nickel trading and the

cancelling of overnight trades that were ru­

moured  to  be  in  the  billions  of  dollars.  It

said it halted trading in the early hours of

March  8th  when  it  reckoned  the  nickel

market  had  become  disorderly.  It  added

that its decision to cancel that day’s trades

was because the big price moves had creat­

edasystemicrisktothemarket,raising

concernsofmultipledefaultsbymember­

brokersstrugglingtomeetmargincalls.

Thatlatterdecisionisthebiggestbone

ofcontention.Criticssayitfavouredthose

withshortpositions,suchasphysicalpro­

ducers andtheir banks,overthose with

longpositionsthatcouldbesoldata big

profit.Theyaskwhyit steppedintoprotect

brokerswhenthelmehasa defaultfund

thatitsmemberscangetaccesstointimes

oftrouble.“Thedecisiontoerasethetra­

des...willunderminelong­termconfidence

inthelme,” saysYaoHuaOoiofaqr, anas­

setmanagerthathadtradescancelledon

March8th.“Ifyouwanttheaqrs ofthis

world[inthemarket],youcannotinter­

venewhentheymakemoneyandithurts

yourbrokers.”Hesaidthefirmwasexplor­

ingalloptionsagainstthelme.

Thelmehassincesetdailylimitson

price moves (which were exceeded on

March16thwhenit brieflyreopenednickel

trading).Thatisanothersignof interven­

tionbyanexchangethatusedtoprideit­

selfonitsfree­marketnature.Itsownerin

Hong Kong,withChinalookingoverits

shoulder,wouldnodoubtapprove.n

Windfalltaxes

Power grab

O

n march8th, the day the price of a bar­

rel of Brent crude oil spiked above $127,

the  European  Commission  unveiled  its

grand  plan  to  fight  stratospheric  living

costs.  Claiming  that  the  “crisis  situation”

warranted exceptional measures, it recom­

mended that member states levy a one­off

tax  on  electricity­generating  firms.  The

revenues raised could then be used to keep

households’ bills down. The next day Eliza­

beth  Warren,  a  senator  from  Massachu­

setts, tweeted that she and other legislators

were working on a tax on the “war­fuelled

profits”  accruing  to  American  oil  majors.

The  proposal  is  now  making  its  way

through the House of Representatives. 

Politicians  have  reached  for  such

“windfall” taxes before. Bulgaria, Italy, Ro­

mania  and  Spain  have  imposed  them  on

power  generators  in  recent  months,  as

benchmark  energy  prices  have  risen.  In

1980 America announced that it would be­

gin taxing oil producers in six years’ time,

hoping  to  cash  in  on  profits  that  were  ex­

pected to be made after prices were deregu­

lated.  Britain’s  new  Labour  government

taxed  utilities  in  1997,  after  the  Conserva­

tive government had sold them off cheaply. 

The levies are understandably tempting

for the taxman. Big windfalls mean big re­

ceipts. The usual worry with a tax is that it

might  change  companies’  behaviour,  say

by encouraging them to lower investment

in order to bring down future tax bills. But

the event causing the windfall is meant to

be  a  one­off,  unconnected  to  investment.

They are “extremely efficient ways to raise

revenue”, says Helen Miller of the Institute

for Fiscal Studies, a think­tank in London.

At least, in theory.

Britain’s  tax  probably  fitted  the  ideal

better  than  most.  It  had  a  clear  rationale:

that  excess  gains  had  come  from  the  un­

derpricing of shares when firms were pri­

vatised.  Post­privatisation  profits  were

multiplied  by  a  price­to­earnings  ratio;  a

23%  tax  was  levied  on  what  was  left  over

once  public  proceeds  from  privatisation

were  subtracted.  Even  then,  however,  the

tax failed to target the beneficiaries of ex­

cess gains. British Telecom, the first utility

to  be  privatised,  had  listed  in  1984.  Many

early  punters  had  come  and  gone,  leaving

shareholders in 1997 bearing the burden. 

Levies elsewhere have faced other hur­

dles.  In  2006  Mongolia  introduced  a  68%

charge  on  profits  from  copper  and  gold

sales, hoping to cash in on a new mine dur­

ing a commodity­price boom. Instead, in­

vestors withheld funds for the project until

regulators  agreed  to  drop  the  tax.  Ameri­

ca’s  tax  did  distort  firms’  behaviour,  by

some  estimates  reducing  oil  production

between 1980 and 1986 by up to 4.8%.

The  European  Commission’s  plan  has

its  flaws.  It  does  not  explain  why  the  cur­

rent situation warrants a one­off tax, add­

ing  uncertainty  about  when  such  levies

might be used again. Furthermore, the en­

ergy  industry  buys  and  sells  power  using

long­term  contracts,  making  the  link  be­

tween  today’s  prices  and  tomorrow’s  pro­

fits fuzzy. And prices can fall as quickly as

they  rise.  By  March  16th,  for  instance,  the

oil price was back to about $100 a barrel. 

Recent  experiments  offer  scant

grounds for optimism. Romania, Italy and

Politicians turn to a tax that is enticing

on paper, but tricky in practice

The taxman’s temptation