By Pratima Desai

LONDON (Reuters), -The CME Group talks to market participants to discuss the possibility of a cash-settled Nickel contract that would allow companies to offset the cost of raw material for the electric vehicle batteries, according to two sources who have knowledge.

Participants in the market believe that a viable alternative trading platform would offer disgruntled traders the possibility to relocate away from London Metal Exchange, where nickel trading crashed early March.

In just hours, nickel prices in the LME rose by more than $100,000 per ton in March. This was due to Russia’s major producers igniting a market that had been rallying.

Expectations that Tsingshan Holdings Group, a Chinese producer of stainless steel, would purchase metal in order to fill substantial short positions drove the spike.

LME has suspended nickel trading and cancelled billions in deals, raising doubts about the market’s ability to maintain order.

Shanghai Futures Exchange has a nickel contract. However, it can be difficult to use for companies not from China as it requires them to have an affiliation with a local entity. It is also priced in yuan.

At the moment, trading or hedging nickel is not possible. This metal is used mainly to make stainless-steel. Sources said that the CME may launch a nickel-sulfate contract by the end this year.

Nickel trading volumes at the LME are down since the suspension of March. 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 sulfate is used in the manufacture of the anode part of rechargeable lithium-ion cells that are used for electric vehicle power.

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 refused to comment.

Benchmark Mineral Intelligence projects that nickel demand in electric vehicle batteries will increase to almost 1.7 million tonnes by 2030. This is 33% more than the 350,000 tonnes, which was 12% less last year.

According to industry sources, a cash-settled future for nickel sulphate has a greater chance of success than an physically deliverable contract. This would mean that producers must deliver the metal 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. These contracts compete directly with existing LME products.

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 a hedge for days, weeks and even years in the future. Copper is the only CME-based base metal contract that actually works, and it’s very popular among speculators.

Some traders prefer to trade on the CME contract, as their trades can be settled immediately after they close. On the LME however, settlements occur on the third Wednesday each month.