COLUMN-Lead stocks; how to have fun in a bear market: Andy Home

(Repeats July 17 column with no changes. The opinions expressed here are those of the author, a columnist for Reuters)

By Andy Home

LONDON, July 17 (Reuters) - Whoever took all the lead out of the London Metal Exchange (LME) warehousing system in the second quarter has just been kind enough to return it.

A total 50,475 tonnes of the heavy metal were placed on warrant in the South Korean port of Busan earlier this week.

It represents the largest piece in the puzzle that started on March 20 this year, when 98,350 tonnes of lead, or 41 percent of all LME-stored stocks, were cancelled in preparation for physical drawdown.

At 217,900 tonnes LME stocks are now pretty much back where they started the year.

So is the price. Benchmark three-month metal is currently trading around $1,835 per tonne, down just 2 percent from the start of January.

Lead's prospects look as unexciting now as they did back then with China, the great driver of all things metallic, having shifted from net importer to marginal net exporter of lead a couple of years ago.

The International Lead and Zinc Study Group assesses lead as being in small 7,000-tonne surplus over the first five months of 2015.

But whoever was behind the global lead raid has had their fun.

While stocks have been on a world tour, the price has enjoyed its own mini boom-bust cycle, making it as high as $2,162 in May before tumbling all the way back down again.

Spreads have been all over the place, the cash-to-three-months period trading out to $15 backwardation, also in early May, which is the tightest it's been in a couple of years.

There has been money to be had in both options and physical premiums and somewhere in the mix is the underlying cost of storing all that lead.

Not bad for shuffling 100,000 tonnes or so of metal around. This is how to have fun in a bear market. When outright prices are doing nothing other than grinding steadily lower, storage costs, spreads and premiums are where the action is.

It's been an overarching theme in the aluminium market ever since the Global Financial Crisis and helps explain the continuous ebb and flow of LME zinc stocks in New Orleans.

LOST AND FOUND

It's worth recalling that the LME "Street", or at least that small part of it that tracks the lead market, was always convinced that the metal drawn out of the system after those March cancellations was heading for South Korea.

The only missing information now is which warehouse company was the recipient of the missing lead.

Take your pick from Steinweg, CWT Commodities, H&M Metal Warehousing, Henry Bath, Metro (Other OTC: MTRAF - news) and both Pacorinis, the one owned by Glencore (Xetra: A1JAGV - news) and the one which originally sold its warehousing business to Glencore but which has since re-entered the LME storage business.

Those in the know will already know. The rest of us will have to wait for the LME's next monthly report showing the breakdown of stocks by warehousing company.

The latest report helped answer another part of the lead riddle, namely the warranting of 36,500 tonnes at the Dutch port of Vlissingen last month.

Vlissingen has been dominated by Pacorini, the Glencore one, for so long that the easy inference was that it must have been on the receiving end.

However, while 52,450 tonnes of metal were warranted at Pacorini last month, that corresponds perfectly with the inflow of aluminium at Vlissingen.

Rather, it was Worldwide Warehouse Solutions (WWS), owned by Noble Group, which saw its registered stocks jump by, yes, you guessed it, 36,500 tonnes. Prior to that WWS held just 618 tonnes of LME-registered metal at Vlissingen.

Another curiosity in terms of lead stocks has been the flow of 4,450 tonnes onto warrant at the recently-listed port of Moerdijk, where the only listed operator is Independent Commodities Logistics (ICL).

A red herring maybe?

But the combined warranting activity at Busan, Vlissingen and Moerdijk has totalled 91,425 tonnes, which roughly tallies with those March cancellations, after factoring in the shuffling of metal back onto warrant at the Spanish locations of Bilbao and Barcelona.

AFTER THE QUEUES

The boost to warranted stocks at WWS in Vlissingen and ICL may well herald a new chapter in the LME warehousing space.

The business of LME warehousing has been dominated by load-out queues in recent years, a model first pioneered by Metro at Detroit and subsequently finessed by Pacorini at Vlissingen.

The LME, however, has been targeting the queues with its load-in-load-out formula, which has just been tightened further to the point that the exchange now expects queues to fall below its targeted 50-day threshold in May next year.

Moreover, a new barrage of measures, including lifting stipulated load-out rates and capping rent on metal locked in queues is intended to prevent others trying to build future queues.

What this means, given no evidence of underlying deficit in markets such as aluminium, zinc or indeed lead, is that there is a whole lot of metal leaving Detroit and Vlissingen in search of new storage.

Many have seen an opportunity in that dynamic, witness the number of new companies that have registered to store LME warranted metal, companies such as ICL at Moerdijk.

More warehousing competition is decidedly a good thing for LME users but there is also the possibility of a round of "warehouse wars" as new players vie to grab their piece of the pie.

Since they can't trade directly themselves, they have to form alliances of convenience with merchants to actually get the metal.

It's precisely this sort of warehouser-merchant combination which is believed to have been behind the March lead heist. The warehouser gets its metal and the merchant gets its fun on the market.

Expect more of the same going forwards.

Indeed, it's noticeable in this morning's LME stocks report that 6,250 tonnes of the lead just delivered into Busan has been cancelled.

Huh! Maybe the great lead stocks shuffle isn't over just yet.

Just remember, though, that fighting over who stores metal is predicated on the fact that there is lots of metal to store in the first place. It's a way of making money in bear markets, not bull markets, where stocks are drawn down to plug supply-demand gaps rather than to sit in other warehouses. (Editing by David Evans)