Forcing LME warehouse operators to comply with faster aluminium load-out rates was supposed to bring down excessive spot premiums for fabricators and end-users.
The idea very loosely was that if end-users could get their hands on metal, which was otherwise trapped in the inventory system, they would not be beholden to the higher prices charged by producers for the privilege of direct delivery. Everyone would be a winner – yay!
And yet, as FT Alphaville pointed out on a number of occasions, we thought the LME’s solution — by misdiagnosing the problem — would not be successful. If anything we worried the premiums could get worse before they got better, since a lot of the inventory rather than making its way to market would only be shifted into private dark inventory stores instead. Read more
Rio Tinto’s problems with its aluminium business are well documented.
But things could have been worse without all that warehousing shenanigans from Goldman et al. Read more
The London Metal Exchange said that the UK’s Financial Services Authority had given approval for its $2.2bn acquisition by Hong Kong Exchanges and Clearing. The transaction is expected to close next week.
But there are still hurdles. First, a court hearing. From the statement by HKEx: Read more
According to Wikipedia, compulsive hoarding is a disorder characterized by the excessive acquisition and inability or unwillingness to discard large quantities of objects that would seemingly qualify as useless or without value.
We’d like to make the case that China is suffering from this disorder and that we’re at the stage where a psychopharmacological intervention needs to be organised by China’s friends and family. If not China’s hoarding tendencies could destroy the world as we know it. Read more
Goldman Sachs is in line for a large windfall from its stake in the London Metal Exchange,after the LME put itself up for sale, according to the FT. Goldman has quadrupled its stake in LME over the past two years. The buying spree has made the bank the LME’s largest shareholder with a stake of 9.5 per cent, potentially worth as much as $150m. LME holders could gain a fifteen-fold payout on their stake from the sale, which could fetch more than $1.6bn.
FT Alphaville noted a couple of weeks ago how backlogs at London Metal Exchange (LME) warehouses in Detroit were seeing some market participants have to wait up to 10 months to receive their aluminium.
We also noted that an independent study into the LME’s warehousing network had recommended upping load-out rates, to try and deal with some of these issues. Read more
Sean Corrigan at Diapason Commodities sends us this chart on Friday:
We’ve already referred to the latest Reuters Metals Insider report on Thursday, but somehow we feel that the following is worth a special mention of its own.
That is, what happens when the government attempts to rein in innovative Chinese financing schemes like those using copper as collateral? Read more
An interesting report comes our way from Frank Veneroso of RCM, who has been looking more closely at the scale of the global copper inventory overhang.
He cites the work of Simon Hunt, an independent copper market expert, who has been warning of untold surplus inventory for many years now. Read more
An interesting press release via Mondo Visione on Wednesday (our emphasis):
Sucden Financial has announced that it will be launching a new service geared towards institutions to capture brokerage opportunities in the Delta One and Equity derivatives and finance arena with effect from January 2011. Read more
JPMorgan was the ‘mystery’ trader behind £1.5bn worth of copper deals last week on the London Metal Exchange, according to the Daily Telegraph. The trade was described in the LME’s daily update as “between 50% and 80%’ of the 350,000 tonnes of copper in reserves. This pushed up the price for immediate delivery of copper last week to $8,700 – its highest since October 2008, at the peak of the financial crisis. A high premium on the spot copper price normally reflects fear of a shortage of the metal, which is in demand across the world. A person close to the situation said JP Morgan had bought the copper contracts, noting the amount was closer to the “lower portion of the range” disclosed by the LME.
Tin prices rose to a two-year high, less than 10 per cent below the metal’s all-time high set in mid-2008, as production problems in Indonesia, the world’s top exporter, continued to tighten the market, the FT reports. The metal, used for soldering in the electronics industry, could hit a record high before the end of the year or early in 2011, analysts and traders said. If the forecast proves accurate, tin would become the first base metal to revisit the all-time highs set in mid-2008. Analysts are also betting that copper prices could set an all-time high in 2011, the FT said.
Trading in steel futures at the London Metal Exchange surged nearly fourfold in the 2010 first half, marking the first sign of interest among producers, consumers and investors in the nascent steel derivatives market, the FT reports. The LME is vying with New York, Shanghai and Dubai exchanges for dominance in derivatives trading in the $500bn-a-year steel market.
Prof Pirrong of the University of Houston tackles the complexities of clearing by central counterparties…
Since the late-90s, I’ve emphasized in my academic writing the importance of accurate price information in making clearing efficient-or even possible. It is therefore encouraging to see this article in the FT make the same point. It is important to note, though, that although this is an important part of the story, it is not the whole story. Read more
China’s Q1 GDP growth figures came in on Thursday at a quarterly 6.1 per cent – less than the widely forecast 6.3 per cent, reports Reuters, reflecting a further slowdown in the country’s hitherto stellar growth.
But is this only a temporary slip? Could China actually be one step ahead, actively masterminding its future GDP dominance forever? Read more
Commodities traders are rushing their private bilateral contracts into exchanges and clearing houses as they race to reduce their counterparty risk amid a deepening financial crisis. The transfer of the opaque over-the-counter deals comes as observers warn that commodities, where trading has ballooned in the past five years, could be the next market hit by counterparty failures. Martin Abbott, chief executive at the London Metal Exchange, said the crisis was bringing new business into the LME as traders tried to reduce their risk, with turnover 45% higher in September compared with a year ago. The LME, the world’s largest base metals exchange, has extended its forward-dated futures in copper and aluminium to 10 years from five as it tries to capture OTC business. The LME’s move comes as other exchanges push into the OTC clearing business, in part to capitalise on the strong backing that regulators have given to the creation of a central clearing counterparty model for the credit derivative markets.
The aim is to reduce the systemic risks inherent when credit derivatives are negotiated bilaterally between traders by having a clearing house guarantee against default.
Credit rating agency Fitch has just downgraded Lehman to D, the lowest mark on its scale.
Fitch Ratings-Chicago-15 September 2008: Fitch Ratings has downgraded the long- and short-term Issuer Default Ratings (IDRs) and outstanding debt ratings of Lehman Brothers Holdings Inc, (LBHI), parent of Lehman Brothers Inc and other subsidiaries as follows: Read more