The London Metal Exchange is trying to regain its dominance in global trading after nickel turmoil earlier this year.
Nickel trading at the world's oldest and largest metals trading venue collapsed in March when prices doubled in a matter of hours to a record of more than $100,000 a tonne.
LME data show that many players have abandoned the nickel market. Several traders said the trend would continue to lead to lower volumes and greater volatility as more people chose to negotiate prices directly. Average daily trading volume of nickel on the LME plunged 50 percent last month from a year earlier to 203,856 tonnes.
Andrew Mitchell, an analyst at Wood Mackenzie, said: "The drop in trading volumes is most likely due to the fact that there is still some lack of trust in the LME after the chaos of March. LME nickel does not represent the majority of the market." Jim Lennon, analyst at Macquarie, said only 650,000 tonnes of nickel could be delivered under LME contracts this year, or about 21 per cent of global production, compared with 50 per cent in 2012.
The LME said it was "actively engaging with users to consider potential improvements to its nickel contracts and to do more to address the growing nickel market and its different forms."
Some traders believe the LME nickel contract is entering a vicious cycle of low liquidity resulting in lower trading volumes and extreme price volatility.
The shift to LME contracts has been spurred by volatility and rising supply of Indonesian nickel pig iron (NPI), a low-grade cheap alternative to pure nickel. NPI is expected to account for more than 50 percent of global supply this year, up from 12 percent in 2010 to 3.1 million tons, Mitchell said. Lennon said NPI was in oversupply, with prices around $16,500 a tonne and LME nickel around $24,500 a tonne.
Bank of America analyst Michael Widmer: "The way the market has developed, the LME contract is not perfect, it caters to one pocket."
Nickel sulfate is another product, used to make cathode parts in electric vehicle batteries. Stocks of LME nickel, which can be used to make nickel sulfate, have been depleted and are now made from nickel matte, which can be made from NPI.
Rival CME Group is exploring a nickel sulfate contract, according to people familiar with the matter. Stainless steel plants consume about two-thirds of global nickel supply, and electric vehicle batteries are expected to take a bigger share, about 30 percent by 2030, as sales surge due to the energy transition.
