LONDON - The London Metal Exchange (LME) has discovered bags of stones instead of the nickel that underpinned a handful of its contracts at a warehouse in Rotterdam, in a revelation that will deliver another blow to confidence in the embattled exchange.

The amount of metal represents just 0.14 per cent of live nickel inventories on the LME, worth about US$1.3 million at current prices, so the immediate impact on metals markets is limited.

But the shock announcement has much wider implications: in an industry riddled with scandals, the LME’s contracts are viewed as unquestionably safe.

The news that even a few of them have been compromised will raise fresh questions about its systems and procedures while the 146-year old exchange is still wading through the fallout of its last nickel crisis.

“LME warehouse warrants used to be the gold standard of warehouse warrants around the world, treated as a near-cash equivalent,” John MacNamara, chief executive officer of Carshalton Commodities Ltd. and a veteran commodity trade finance banker, wrote on LinkedIn. “Something has gone horribly wrong at the LME.”

It also comes at a fraught time for the wider metals world, after trading giant Trafigura revealed in February that it had been the victim of a vast alleged fraud involving missing nickel cargoes. The news that a powerful player like Trafigura is facing hundreds of millions of dollars in losses has spooked others in the industry and prompted some to check on their own metal cargoes.

However, the one place where metal has always been considered perfectly safe is once it has been registered “on warrant” in an LME-approved warehouse. Contracts on the LME, which are the global benchmarks for industrial metals including aluminium, copper and nickel, are underpinned by physical metal in the network of warehouses around the world – any trader holding a contract to delivery receives a parcel of metal in an LME-registered warehouse.

The LME discovered the problem after it received reports that some nickel delivered out of a warehouse in Rotterdam contained bags of stones instead of nickel briquettes. The warehouse is operated by Access World, according to people familiar with the matter. The company was previously owned by Glencore, and said in January it had been acquired by Global Capital Merchants.

Access World, which is one of the more...