COLUMN-LME stocks raid kicks lead market into life: Andy Home

(Repeats March 24 item)

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 (Other OTC: FSTC - news) , 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)