By Pratima Desai

LONDON (Reuters), – CME Group, (NASDAQ:) talks to market participants to discuss the idea of a cash settled nickel contract that would allow companies to offset the cost of raw material for electric vehicles. This is according to two sources who are familiar with the matter.

According to market participants, a viable alternative venue for trading would allow disgruntled customers the chance to leave the London Metal Exchange (LME), where nickel trading became chaotic in March.

In just hours, nickel prices in the LME increased by a record amount to over $100,000 per tonne. This was due to Russia’s War in Major Producer Russia.

This spike resulted from expectations that Tsingshan, the Chinese stainless steel producer Tsingshan holding Group, and other metal buyers would acquire metal to help cover significant short positions.

LME stopped nickel trade, and cancelled billions of dollar worth deals. This raises questions about LME’s ability maintain an orderly market.

Shanghai Futures Exchange has a nickel contract. However, it can be difficult for foreign firms to use it as they will need to associate with a local entity or because the price is in yuan.

There are currently no viable alternatives to hedging and trading nickel. Nickel is mainly used in the production of stainless steel. Sources said that the CME may launch a nickel-sulphate contract by the end this year.

Nickel trading volumes at the LME are down since March’s suspension. It was 8.91 million tonnes, or 819.108 tons in April. In February it was 1.7 million tonnes (or 10 million tonnes) and February saw more.

Sources familiar with the subject said that it wasn’t possible to estimate how much nickel a CME contract would take from an LME contract.

Nickel sulphate, a chemical that is used in the manufacture of the anode portion of rechargeable lithium ion batteries for electric vehicles.

One source stated that CME had been in contact with market participants to discuss the possibility and demand for nickel sulphate contracts.

While a financially settled Nickel Sulphate contract might work, electric cars are the future. The auto industry must be able hedge the material used in making them.

CME declined comment.

Benchmark Mineral Intelligence predicts that the nickel demand for electric car batteries will grow to almost 1.7million tonnes in 2030. That’s 33% higher than 350,000 tonnes last year, or 12%.

Sources in the industry say that a cash-settled nickel sulfurate future is more likely to succeed than a physical deliverable nickel metal contract. That would require metal producers to deliver it to CME warehouses.

According to industry sources, the CME’s lead, zinc, and aluminium contracts can be physically delivered but are hampered due to a shortage of stock at its warehouses. Contracts are directly competing with LME products already in existence.

CME aluminum volume at almost 460,000 tonnes in April was a fraction of 95 million tonnes on the LME.

A second source who is familiar with the subject said that the CME cannot offer the physical market what it needs. It can not be able to provide hedging for days, weeks and even years. The only CME CME base metal contract is Copper, which works because it’s popular among speculators.

Some investors prefer CME’s contracts as trades on these are done as soon as possible. LME trades, however are completed on the third Wednesday in each month.