The London Metal Exchange has lost its benchmark status in a key part of the nickel market since last year’s massive short squeeze, according to one of the biggest producers.

Christel Bories, CEO of France’s Eramet, said that an index produced by Shanghai Metals Market “has become the benchmark” for pricing ferronickel, a form used for making stainless steel. Eramet says it is the world’s second-largest ferronickel producer.

The loss of significance of its nickel contract is one of a number of challenges facing the LME in the wake of the crisis last March, when the exchange responded to skyrocketing prices by suspending trading and canceling billions of dollars of trades. The LME is also the target of legal action from hedge fund Elliott Investment Management and trading firm Jane Street, as well as an enforcement investigation from the UK’s Financial Conduct Authority.

Prices of different forms of nickel have diverged sharply since the crisis last year. While the LME contract has historically been the reference price for the global nickel industry, only around 25% of nickel production is in the pure metal form that is deliverable at the exchange. The rest comes as intermediate products — like ferronickel — that are used directly by the steel and battery industries.

“There’s an increasing disconnect between the market fundamentals and the product that’s physically stored in the LME warehouses,” Bories said. “The LME’s problem is that it’s pricing the pure ore. Meanwhile nickel is less and less used as a pure metal.”

Ferronickel accounts for just over 10% of global nickel output. The nickel pig iron and nickel sulfate markets, which together represent another 60% or more of global output, are also increasingly using indexes rather than the LME as benchmarks, according to Bories.

The shift is a headache for producers and consumers of nickel, as the price of the products they buy and sell becomes disconnected from the LME, and yet there are no real alternatives to the bourse’s nickel contract for hedging.

The LME has laid out an action plan to rebuild confidence in its marketplace, which includes working to launch a new platform for trading non-pure forms of nickel. Still, its current nickel contract continues to struggle, with average daily volumes in April down 56% compared with February 2022, the month before the crisis.

The short squeeze on the LME is not the only reason for the divergence in nickel prices. Booming Indonesian production of intermediate forms of nickel has helped weigh on their prices, even as the market for nickel metal remained relatively tight.

There are several new plants being developed to convert intermediate products into refined metal that are expected to help close the gap. The LME has said it will “fast track” its process to approve companies to deliver their metal against its contracts.