LONDON - A UK financial regulator's move to launch an unprecedented probe into potential misconduct over the London Metal Exchange's nickel trading crisis could last years, regulation experts say, heaping further damage onto the LME's already bruised reputation.

Sliding activity and shrinking liquidity, due to an overall lack of faith in the LME's offering, has left nickel consumers and producers without a global reference price.

Metal industry sources said the new investigation will leave the exchange distracted from focusing on reviving its nickel contract, where volumes have tumbled due to consumers, producers, traders and investors shunning the market, with wild price swings still a recurring feature.

On March 8 last year, nickel prices on the LME doubled in a few hours to a record above $100,000 a tonne in disorderly trade triggered by the cutting of large short positions or bets on lower prices.

The world's oldest and largest forum for metals cancelled all nickel trades on that day and suspended trading for the first time since 1988.

A few weeks later in April, the Bank of England (BoE) launched an investigation into the LME's clearing house, LME Clear, and the Financial Conduct Authority (FCA) started a review of the LME.

The FCA has started an "enforcement investigation" into LME conduct and systems and controls in the period between Jan. 1 2022 and the time of suspension on March 8, 2022, the UK watchdog said on Friday.

The watchdog confirmed this is the first time it has launched such an investigation against an exchange.

Lawyers including James Alleyne, legal director at law firm Kingsley Napley said the investigation could take years to conclude.

"You can't really drive the exchange forward and get back to normal business until the matter (investigation) is closed," one senior metal industry source said.



Most of the nickel produced is used to make stainless steel, but the metal is now also a key material for the electric vehicle industry, where it is used in the cathode component of batteries.

Consultancy Benchmark Mineral Intelligence (BMI) estimates nickel demand from the battery sector will amount to around 30% of the total at 4.8 million tonnes by 2030, up from 14% of three million tonnes in 2022, with most of that growth coming from electric vehicle batteries.

Average daily LME nickel volumes have crashed since March last year, dropping 45% in December from a year earlier, following year-on-year losses of 51%, 54% and 40% in November, October and September respectively.

"Investor confidence in the LME was badly shaken by the crisis and must be rebuilt," said Jennifer Han, Chief Counsel at the Managed Funds Association.

Much lower volumes and liquidity have also prompted others such as Global Commodities Holdings (GCH) to try and offer alternatives.

UK-based GCH will launch a physical nickel trading platform by the end of March. Prices from the platform will be used to create an index, which CME Group according to sources is planning to use to launch a nickel contract.

If an alternative gains traction, the LME will struggle further in its bid to rebuild nickel volumes, ending hopes of reviving the authority of its contract.

"We stopped using the (LME's nickel) contract last March because it doesn't reflect reality," said a source at a nickel consumer. "We want to be able to hedge on exchange, if someone else offers us another option we will probably try it."

Nickel industry sources say the only way to restore LME nickel's reputation as a global benchmark is the return of volumes and liquidity, but when and how that happens remains to be seen, particularly now with the FCA's investigation.

Part of the problem for the LME's nickel contract is that it does not represent the global market because the metal that can be delivered against it amounts to only around 20% of world supplies. Around 50% comes in the form of nickel pig iron which cannot be delivered against the LME's contract.

(Reporting by Pratima Desai; editing by Veronica Brown and Susan Fenton)