The LME aluminium mystery

While aluminium inventories appear high on paper, the market is quite tight

How can a market be burdened with millions of tonnes of excess stock and at the same time be prone to almost continuous tightness?

This is the conundrum posed by the aluminium contract traded on the London Metal Exchange. (LME). LME front-month spreads have just passed through another period of extreme turbulence.

At its most acute, on February 29, the cost of borrowing metal for the three weeks to the March prompt date flexed out to $29 per tonne. The cost of borrowing for a single day, known in the London market as ‘tom-next,’ reached almost $8.5 per tonne on March 3.

The benchmark cash-to-three-months period has so far this year spent twice as much time in backwardation as in contango.

Yet this is a market defined by massive legacy inventory. Most of it is ‘hidden’ in off-market storage — some say this is not less than 10 million tonnes.

Something’s not quite right. Maybe it’s the fact that for many months now someone has been holding much of the LME inventory and using that position to exert pressure on shorts rolling their positions forward. But that in itself is a sign of a more fundamental problem with the LME aluminium contract.

Last time, it was the disconnect between LME price and physical premiums. This time it’s the disconnect between nearby and forward spreads. There’s a worrying possibility that the LME’s solution to the first problem, attacking the persistent load-out queues in its delivery system, is now creating a new problem.

Who’s got the metal?

As of the close of business Tuesday one entity was holding between 50 and 80 per cent of all the ‘live’ stock in the LME system. That would make the position somewhere between 1.43 and 2.29 million tonnes.

This is not news to anyone trading the LME aluminium market. That dominant position holder has been there for many months, albeit with a fluctuating amount of metal at any one time. This sort of long position requires very deep pockets.

And our ‘mystery long’ is not breaking any LME rules. The LME doesn’t prohibit such big positions but it does put limits on their potential abuse. In this case, such a massive holder of metal must lend to shorts at a prescribed rate. Moreover, the LME’s compliance department will have been in regular contact with this buyer.

Money out, stocks out

It is also becoming easier to squeeze the LME aluminium contract’s nearby dates. Firstly, the withdrawal of investment money from commodities by passive index investors, has reduced the amount of lending generated by funds rolling their long positions forward.

Secondly, the amount of underlying stock liquidity in the LME warehouse system has been steadily declining. ‘Live’ tonnage, meaning that which isn’t earmarked for physical withdrawal, hit a seven-year low of 1.63 million tonnes in December.

This year has seen that figure rebound to a current 2.87 million tonnes as previously cancelled metal has been re-warranted.

Distressed shorts have delivered fresh units into the system too. But not all of that headline figure on stocks is available for settlement of LME positions. Some of it is locked up in long-term financing deals.

The outlook is for LME stocks to continue declining over the medium term. This is where the LME’s increasingly draconian anti-queue rules are having an effect.

Accelerating outflows

Even while new aluminium units are arriving, ever increasing amounts are leaving. The daily load-out rate at Vlissingen, the location of the longest queue, has just accelerated from 3,000 to 4,000 tonnes per day.

That’s because Pacorini, the warehouse operator that ‘owns’ the queue at the Dutch port, is complying with the LME’s new elevated load-out rules.

The Vlissingen outflow will accelerate again from next month when another new rule, limiting the rent on queue-locked metal, kicks in. Most, if not all of this metal, is headed for off-market storage, which is considerably cheaper than LME storage. Warehouse rental is the single-biggest cost for metal financiers, who seek to make a return on the difference between short- and long-dated futures.

Stock financing is a core function of any commodity market. Consider the implications of it not being there and 10 million-plus tonnes of aluminium swamping the physical market.

Vicious circle?

But this financing function is creating a potentially vicious circle in the LME aluminium market right now. Those looking to move stocks out of the LME system will be rewarded with ever faster load-out.

The promise of faster outflow leaves the aluminium contract even more vulnerable to the sort of dominant-position pressures seen over the last couple of months. Unless the dominant long gives up, it’s difficult to see how this cycle is going to be broken. And even if the current buyer (long) does cash in, another one could just as easily play the same game, given the continuing migration of inventory from LME to off-market storage.

Aluminium looks set to continue to be plagued by LME delivery issues, just a whole different set of issues to last time. It would be deeply ironic if the solution to the previous abnormality is the cause of the new one. - Reuters

hindubusinessline

The Reason For Copper's Dramatic Surge: Chinese Copper Inventories Hit Record

Two weeks ago we reported that one month after China created a record $520 billion in total credit (TSF), through February 18 Chinese banks had followed through with another CNY2 trillion according to MarketNews, meaning that in the first two months of the year China will have created a gargantuan $1 trillion in new credit between loans and unregulated shadow banking issues.

A question that emerged is what China is spending all this newly created money on. One answer emerged overnight when Bloomberg reported that after tumbling in the first half of 2015, copper inventories at the Shanghai Futures Exchange had been steadily rising, and in the most recent week soared by 11% to an all time high of 305,106 tons.

At the same time reserves at the London Metals Exchange declined for 11 days to the lowest level in more than a year, in other words China is shifting idle inventory from Point A to Point B.

Bloomberg adds that as a result of this massive spending spree, inventories tracked by the Shanghai Futures Exchange are higher than stockpiles monitored by the London Metal Exchange for the first time in a more than a decade.

This explains two things:

• for all talk of reform, China is once again building a bubble in excess capacity and stockpiling surplus commodities, which will likely last as long as China floods the economy with newly created bank loans;
• The recent surge in the price of copper, which has been a direct function of China's recent massive restocking

Most importantly, this means that the world is now back to the "old regime" China, where it was stockpiling massive amounts of inventory as only possible the "use of capital" of trillions in new money created, which of course is precisely the "regime" that created the hard landing scenario that China finds itself in at this very moment.

And so, can kicked. The only question is for how long.

21 Ways to Achieve Wealth and Success

Traders has seen these 11 Situations

Great Trading Calculations by William Delbert Gann

What commodity markets want from FM

Traders seek, among other things, CTT abolition to improve volumes

The Indian markets are gearing up for the big event today — the Union Budget. We take a look at what the commodity market participants expect from it.

Commodity Transaction Tax

If there is one wish that tops the list for almost all participants in the commodity sector, it is the removal of the commodity transaction tax (CTT) that was introduced in July 2013. This tax is levied on the sale transaction of the commodity futures except for exempted agricultural commodities such as chana, soyabean, turmeric, etc.

The introduction of this tax has taken trading volumes sharply lower in both the Multi Commodity Exchange (MCX) and the National Commodity and Derivatives Exchange (NCDEX). PK Singhal, Joint MD, MCX, says, “CTT has increased the cost of trading derivatives by almost 300 per cent and trading volumes have come down more than 50 per cent after its introduction.”

Singhal also adds that the increased trading cost has moved the domestic trading business to offshore markets like Dubai and Singapore. Data from MCX shows that trading volumes have declined from an average ₹149 lakh crore in 20011-12 to ₹54 lakh crore in 2014-15. In NCDEX, the volumes have slumped from an average ₹18.22 lakh crore in 2011-12 to ₹10.22 lakh crore in 2014-15.

Some of these volume declines are also a result of the commodity price meltdown. NCDEX too expects some relief on CTT for processed agri-commodities like sugar and soyaoil.

Import duty change demands

Hareesh V, Research Head, Geofin Comtrade, says the gold and gem industry is expecting a reduction in import duty on gold to 2 per cent from 10 per cent.

Increasing the gold import duty in August 2013 was one of the several measures the government had taken in order to bring down the current account deficit (CAD). India’s CAD has improved from $21.8 billion in June 2013 to $8.2 billion as of September 2015.

Other expectations

Hareesh adds that in order to protect domestic growers from cheap imports, the rubber industry is expecting an increase in the import duty on natural rubber to 40 per cent from 25 per cent. Similarly, an import duty cut to 5 per cent from 30 per cent is expected for oilseeds.

Sushil Sinha, Head of Karvy Comtrade, wants the Centre to introduce measures to help companies hedge their commodity exposure risk. He also wishes that the Centre allocates more fund and speeds up the process of setting up a national unified agri-commodity market.

He also wants improvement to infrastructure in terms of warehouses, testing labs, research, etc. Sinha believes participation in the commodity market will improve if a clearing and settlement corporation comes up for commodities, like the one prevailing for equities.

NCDEX wants the Budget to introduce measures to allow banks and asset management companies to invest in the commodity futures market.

Also, with commodity market regulation being taken over by the Securities and Exchange Board of India, NCDEX expects the introduction of new products like options and new indices, going forward.

Source:thehindubusinessline

ICSG releases February 2016 Copper Bulletin

The International Copper Study Group (ICSG) has released preliminary data for the month of November last year in its February 2016 Copper Bulletin. According to preliminary ICSG data, copper production and usage data points to a marginal production deficit of nearly 25,000 metric tonnes.

The refined copper market balance for the month of November ‘15 showed an apparent production deficit of nearly 25,000 metric tonnes. The production deficit for the month, after making seasonal adjustments for global refined copper production and usage, stood at 20,000 metric tonnes. The refined copper balance for the initial eleven months of the year ended in production surplus of around 50,000 metric tonnes as compared with a deficit of around 545,000 tonnes during the corresponding period in 2014.

World refined production increased by nearly 1.6% (nearly 330,000 t) during the first eleven months of 2015. Primary production was up 2%, whereas the secondary production held steady. The refined copper production during the month witnessed significant growth of 4.0% in China. The production by the US witnessed an increase of 1.5%. On the other hand, the refined copper output by Chile and Japan dropped by 1.5% and 4% respectively. The African and Asian region recorded 3% rise in refined copper production each. On the other hand, refined output declined by 5% in the Oceania region.

The world copper mine production has increased by around 3.5% (nearly 580,000 t) during the first eleven months of 2015. Concentrate production was up 4% during the period. The mine output from Peru and Indonesia recovered during this period. The mine production by Peru-the world’s third largest copper mine producer, increased by 19%. The production increased marginally by 0.8% and 2% in Chile and the US respectively. Region-wise, Asia recorded 8% rise in production. Also South America and North America recorded 4% and 2% increased output respectively. On the other hand, Africa and Oceania region recorded production decline of 1% and 3.5% respectively.

Meantime, global usage of the metal is estimated to have declined by around 1% (nearly 260,000 t) during January to November in 2015. The Chinese apparent demand increased marginally by nearly 2%. The usage by world countries excluding China has dropped by 4%. The Russian apparent usage dropped sharply by 48% whereas the EU demand declined 4%. Japanese apparent demand too witnessed sharp decline of 7%.