After deducing that Sheffield United Steel had been dumping a massive number of short positions to cash out, Li Yi didn’t rush into action. Instead, he continued to have his people investigate the situation at other steel companies.
He didn’t know until he looked into it, and what he found was shocking.
It turned out that Sheffield United Steel wasn’t the only one liquidating short positions; nearly every steel company—no, every metal company—in the entire London Metal Exchange was doing the same.
That said, while some companies were liquidating short positions to raise cash, they still exercised some restraint, keeping the volume of short positions they sold roughly in line with their own production capacity.
Such companies, even if faced with a short squeeze by long positions, could mostly weather the storm unscathed, with minimal losses.
However, Sheffield’s volume of short positions was far too large, completely exceeding their production capacity. In fact, Li Yi believed they had never intended to make physical delivery from the very beginning.
This is because Li Yi had someone look into Sheffield United Steel’s trading activity over the past few years and was surprised to discover that, every so often, Sheffield Steel would leverage its dominant position in the British steel industry to manipulate steel prices.
The tactic was exactly as it is now: first, they would spot an opportunity for steel prices to rise and sell off large quantities of futures contracts to cash out.
When the market became saturated, far from stopping, they would sell even more contracts as soon as prices dipped slightly, driving steel prices down to rock bottom.
Once futures prices had been thoroughly driven down, they would buy back contracts to ensure they had sufficient physical stock for delivery.
Over the past few years, they have easily raked in over a billion pounds using this method.
Consequently, while United Steelworks of Sheffield remains nominally the largest steel producer in the British Isles, it is effectively transforming into a financial firm.
Precisely for this reason, they pay little attention to the company’s production capacity; in fact, when steel prices were at an all-time low two years ago, they shut down three blast furnaces in succession, directly reducing the company’s production capacity by one-third.
After all, when you can make money effortlessly in the financial markets, who would want to work hard at production?
If the need ever arises, they can simply purchase steel from other companies.
But what they don’t realize is that any single misstep in the financial markets could plunge the company into an abyss from which there is no return.
In his previous life, Li Yi had seen far too many large companies like Sheffield that played with fire and ultimately got burned—both domestic and international.
Take the once-famous Zhuzhou Nonferrous Metals Company, for example. They also engaged in margin trading on the London Metal Exchange, shorting massive amounts of zinc futures contracts—positions far exceeding their established trading plan.
At the time, Zhuzhou Nonferrous didn’t realize that from the moment they began shorting, they had been targeted by a world-renowned futures trader, who joined forces with other institutions to launch a full-scale “short squeeze” against them.
Before the scheme was exposed, Zhuzhou Zinc had already dumped 800,000 tons of zinc onto the market—a figure that far exceeded its annual production capacity of a mere 300,000 tons.
After the incident, although the state intervened comprehensively—taking emergency measures such as cutting losses, calling for margin calls, and reasonably adjusting delivery dates while simultaneously mobilizing supplies from other zinc plants through various channels to organize delivery—efforts were made to minimize losses.
However, due to the sheer scale of the short positions, Zhuzhou Metallurgical was ultimately forced to buy back some contracts at high prices to close out positions and fulfill delivery obligations. This resulted in losses of up to $176 million—equivalent to 1.459 billion yuan—over the final three days of concentrated position liquidation.
Other examples include AVIC Oil in 2004, State Reserve Copper in 2005, Zhonglian Oil in 2008, and Qingshan Nickel in 2022…
None of these companies had a market capitalization smaller than Sheffield Steel, yet they still fell victim to attacks by financial giants in the futures market, and almost none managed to escape unscathed!
Sheffield Steel is now completely mired in this situation; turning the tide against the odds is virtually impossible—even government intervention wouldn’t help!
However, Li Yi cannot force a delivery now either, as a long squeeze requires certain conditions.
First, the contracts must reach expiration; second, it must be confirmed that the opposing party cannot physically deliver the goods; and finally, one’s own side must have sufficient margin.
Only when the contracts reach expiration can one apply to sell the contracts or request physical delivery; if the opposing party has sufficient steel reserves, the squeeze will not succeed.
Furthermore, when physical delivery is chosen, the exchange will require the long side to post additional margin.
After all, most futures contracts today involve leveraged trading, often requiring only 10% to 20% margin—which is essentially just a down payment.
If you choose to sell the contract, that’s no problem.
However, if you want physical delivery, you must deposit additional funds; otherwise, you would be acquiring goods worth several times the value with only a fraction of the capital—which is impossible.
Furthermore, a squeeze requires a trigger!
Soon, the first opportunity arose.
In late April, the British Navy successfully arrived in the waters off the Falkland Islands and soon engaged in fierce combat with the Argentine Navy.
On April 25, the Argentine submarine Santa Fe was spotted by a helicopter from the HMS Anchor and attacked with depth charges, causing it to run aground and lose its combat capability.
Subsequently, the crew of the Santa Fe used the submarine’s remaining power to beach it on a breakwater near South Georgia Island, then went ashore to surrender to British forces, who subsequently regained control of South Georgia Island.
Upon retaking South Georgia, the British commander on the front lines immediately sent a victory report to London: “To Her Majesty: The military ensign now flies alongside the national flag over the skies of South Georgia. God save the Queen.”
The Iron Lady, the Prime Minister, promptly released the good news to the media, vividly describing it as “a celebration for the whole world”…
Upon receiving the news, the entire British Isles erupted in celebration, but the mood in the stock and futures markets turned somewhat delicate.
The smoother the front-line troops fought, the more likely the war would end early; and once the war ended early, metal prices would inevitably fall.
Affected by this, some retail investors holding contracts began to feel uneasy and immediately started selling off their contracts to cash out.
In just a single day, prices for various metals on the London futures market plummeted by 8%.
However, since the major financial conglomerates remained inactive, prices did not spiral out of control.
But good news from the front lines kept coming in one after another. First, the Argentine Air Force attempted to take out the British Royal Navy’s aircraft carrier but ultimately failed; instead, the British Royal Navy successfully completed its blockade of the waters around the Falkland Islands.
At this point, the Argentine forces on the Falkland Islands were cut off, having essentially lost all contact with the mainland.
Immediately following this, on May 2, the Argentine Navy’s cruiser General Belgrano entered the combat zone, where it was relentlessly pursued and blockaded by British submarines. Ultimately, the General Belgrano was sunk just off its home port, resulting in the deaths of 323 Argentine crew members.
As a series of victories poured in, everyone believed that Argentina was on its last legs and that the war would soon be decided.
Consequently, the London Metal Exchange saw a second wave of cash-out selling. This time, some institutions also joined in dumping contracts, causing prices for various metals to plummet.
Just then, a massive number of short positions in steel suddenly appeared on the market, the sheer volume of which shocked everyone.
Everyone assumed that a major player was cashing out and exiting the market, and soon some traders couldn’t hold on any longer and began selling off their contracts en masse.
In just a few days, prices for various metals on the London futures market continued to fall.
Steel was particularly hard hit. In early May, steel futures were trading at 7,236 pounds per contract, equivalent to 288 pounds per ton.
However, in just nine days, by May 10, the price had plummeted to £235 per ton.
While it wasn’t quite a rock-bottom price, at the very least, many institutions that had entered the market later were already starting to lose money.
Upon investigation, Li Yi discovered that the majority of the short positions that had appeared were created by Sheffield Steel. They were resorting to their old tricks again, preparing to crash the market and reap profits from the long positions.
As long as steel prices were driven low enough, Sheffield Steel could buy back the short positions they had sold—meaning they wouldn’t have to physically deliver the metal. The difference in price would be pure profit!
Seeing that the timing was right, Li Yi made his move…
………..