COLUMN-LME stocks raid kicks lead market into life: Andy Home
(The opinions expressed here are those of the author, a
columnist for Reuters.)
By Andy Home
LONDON, March 24 (Reuters) - Someone has just rudely awoken
the lead market from its months-long slumber.
The least glamorous of the industrial metals traded on the
London Metal Exchange (LME) has also been one of the least
exciting.
LME lead for three-month delivery spent 2013 and the
first half of 2014 shuffling around in a range of $2,000-2,300
per tonne. Since then it has drifted steadily downwards,
culminating in last week's near five-year low of $1,676.50.
Apathy has been the defining characteristic of the market.
LME lead volumes fell in 2013 and 2014 and were down again by 6
percent in the first two months of this year, running counter to
the broader rise in exchange volumes.
Things, however, have suddenly changed.
Three-month metal has shot up $150 in a couple of days, with
the front part of the curve flipping into backwardation. The
cash premium over the three-month price was valued at
$10.25 at Monday's close. That's the tightest it's been since
November 2012.
All of which is down to the fact that someone has just
raided the LME warehouse system, grabbing over 40 percent of
registered stocks, a massive 98,350 tonnes, and cancelling them
in preparation for physical departure.
Who and why? More importantly still, will this metal
reappear in the LME system or disappear into off-market
obscurity?
THE GREAT LEAD RAID
The scale of this raid is extraordinary.
The aluminium market has seen bigger one-day cancellations
of metal but within the context of close to 5 million tonnes of
LME-registered stocks and the high-tonnage requirements of
financial rather than physical players.
Moreover, not even aluminium has seen the sort of
system-wide cancellations that have just rocked the lead market.
The breakdown of Monday's reported cancellations, which
actually took place on Friday, is shown in this table.
Total Cancellations Cancelled Ratio
Antwerp 26,250 12,625 48.10%
Barcelona 5,850 4,775 82.91%
Bilbao 15,600 14,000 91.19%
Genoa 4,375 3,575 82.86%
Leghorn 2,750 2,600 94.55%
Trieste 300 300 100.00%
Johor 49,025 15,000 40.80%
Port Klang 35,925 14,450 52.82%
Rotterdam 27,550 8,775 32.58%
Vlissingen 67,900 21,050 31.00%
Kaohsiung 1,175 1,050 89.36%
Singapore 175 150 85.71%
The only two locations that weren't hit were Hamburg, which
holds just 500 tonnes of lead, and Detroit, which has 675 tonnes
but all of it already cancelled.
The overall ratio of cancelled lead tonnage jumped overnight
from barely 5 percent to over 40 percent.
Which helps explain why the nearby part of the curve,
already tightening, has just gone into full backwardation amid
extremely volatile trading conditions.
That still leaves plenty of questions, though, as to what on
earth has just happened to boring old lead.
FEBRUARY SHOWDOWN
The LME's assortment of market-positioning reports, all
backdated a couple of days, offers some sort of rear-view window
on what happened last week.
What emerges is a picture, admittedly blurred, of a major
position transfer between two players and, judging by the size
of the position, two big players.
The starting point of any analysis is the fact that last
Wednesday was the prime prompt for February, a monthly date in
the LME diary that sees positions closed out or delivered
against.
The LME's reports showed one entity going into the February
prime date with cash and warrant positions equivalent to between
80 and 90 percent of all available lead stocks.
By the close of business on Thursday, however, that position
had dropped to between 30 and 40 percent of stocks, suggesting a
major part of the position had been reconciled.
Physical delivery is one form of position reconciliation on
the LME and another exchange report, showing warrant ownership,
suggests this is what happened.
While the erstwhile-dominant long disappeared from the
warrant report as of Thursday's close, a new entity
appeared in the form of a 44.29-percent "unreported" holding of
LME lead stocks.
THE USUAL SUSPECTS?
Such a holding, according to the LME, "occurs when warrants
are not held with a member, or held on behalf of another party
by an LME member".
Normally, what lies in the "unreported" warrant category is
no more than a rounding error, given that most players operating
on the LME have some form of exchange membership or are well
known to their brokers, who channel positioning information
through to the LME compliance department.
That would include all the "usual suspects" when it comes to
this sort of stocks raid. Lead trading is dominated by
physical-trading powerhouses such as Glencore (Xetra: A1JAGV - news) and Trafigura.
The inference from that "unreported" stocks holding,
however, is that the new owner of over 44 percent of all lead
stocks is not one of the usual suspects at all.
Which is possibly why the LME "Street", which keeps a wary
eye on what bigger players are up to, particularly going into
the monthly prime prompt, appears to have been collectively
caught off guard by Friday's mass cancellations.
WHAT NEXT?
So what happens next?
There are three logical outcomes.
First, whoever has just snatched up a big chunk of LME
stocks moves them to another warehouser operating in the same
locations and re-warrants the metal, locking in a better storage
deal.
Secondly, the entity could take physical delivery and ship
the metal to another LME good-delivery point and re-warrant it
with another warehouse operator, locking in both better storage
and more favourable location for physical distribution.
Something similar happened in 2012, the only precedent for
last week's events. LME locations across southern Europe were
stripped of lead in April and May only for a suspiciously
similar tonnage to reappear on LME warrant at Antwerp a couple
of months later.
The third possibility is that the metal leaves the LME
system for non-LME storage, whether in the same locations or in
another location altogether.
The betting on the LME "Street" seems to be on this third
option, although since the "Street" largely didn't see any of
this coming, its lead forecasting powers evidently leave
something to be desired.
However, if a significant part of LME stocks is about to
evaporate into the off-market ether, it has major implications
for spreads in particular, since the amount of inventory left
for settlement is severely reduced.
Actually, whatever happens next, one thing is for sure.
Lead is going to be a much more interesting market than it
has been for the last couple of years. And for the many
black-box funds that have been accumulating short positions on
the recent drift down, that may be the wrong sort of
"interesting".
(Editing by Dale Hudson)