Posts tagged 'Warehouses'

Citi vs Mercuria, a.k.a when commodity repos go wrong

Being heard this week at the High Court of Justice:

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Information asymmetry, bad incentives and Taibbi

Alert, alert! Matt Taibbi of Vampire Squid fame has discovered contango in a five-page mega opus for Rolling Stone magazine, in which he blames all the usual names for crimes against markets, people and everything good in the world. It’s also a running continuation of his “everything is rigged” theme.

But it’s a terribly nauseating read for anyone following the story since 2008.

First off, Taibbi turns out to be a dependable repackager of other people’s stories. Facts and ideas unearthed by others are borrowed and twisted until they fit his own version of reality (often without citation or attribution). Case in point, the “vampire squid” description is surprisingly similar to popular writer ‘Coin’ Harvey’s 1894 description of the Rothschild bank as a black octopus stretching its tentacles around the world.

True, Taibbi never claimed to have come up with the term himself and perhaps it is just a coincidence, but one can’t deny he’s benefited immensely from borrowing it and applying it to Goldman Sachs. Read more

An aluminium supernova which the LME never saw coming

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

Nothing new under the sun, warehousing edition

As they say on Battlestar Galactica, “all this has happened before and all this will happen again”.

And it’s not just Joseph and the pharaoh who offer worthwhile precedents for the “sell-to-store” commodities warehousing carry trade. It turns out similar activities and concerns were very much rife in the grain markets in the 1920s as well.

Here follow some wonderfully evocative of today snippets from the 1921 Federal Trade Commission report on the grain trade: Read more

Beware the darkside of the metal market force

Goldman Sachs launched a spirited defence of warehouse queues last week, arguing that they don’t have an unwarranted effect on physical prices because the hoarding is justified by curve dynamics.

The view, in short, is that because the curve is rewarding the market to store, these supplies are not coming at the cost of supply to the market. In fact, in their eyes, the hoards provide a balancing mechanism to what would otherwise be an oversupplied market. Yay for warehouses! They’re just keeping prices balanced! Read more

Boron Group Metals pricing update

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

Assessing the scale of metal warehouse trades

Earlier this week Morgan Stanley published an in depth look into the financing warehouse trades in metals — the ones most analysts have been in denial about (at least publicly) for at least five years — and why they are now, thanks to new LME proposals, finally easing.

The note is titled: “Beginning of the end in warehouse trades: A game changer for base metals”.

There were three notable observations.

First, it’s not just banks that should be blamed for fuelling the queue and inventory over-financing problems. Part of the problem is related to the general demise of independent warehouse operators in the metals industry. That is to say, there aren’t enough warehouse owners who do not have conflicting interests as traders or bankers on top of their warehousing businesses: Read more

Commodity warehousing, the interest rate connection

There are three things that must be remembered when it comes to banks, trading houses and warehousing plays.

But even then, it only pays to store for as long as the commodity returns beat money-market returns. And that means, it only pays to store for as long as someone in the market is prepared to pay a premium for delivery of the commodity tomorrow rather than today. Read more

The ‘Tin Man’ and the ‘Johor shuffle’

First there was Copper Fingers. Then there was Choc Finger. Later we had The Whale.

What all of these traders respectively had in common (and no, they weren’t all Bond villain rejects) was that they all became the markets they were trading. Read more

LME warehouse recommends upping load-out rates

An independent study by the London Metal Exchange into its authorised warehouse networks has advised much harsher recommendations than expected.

Key among them is that warehouses with large stockpiles be required to deliver greater sums of metal out of their inventories than is now the case. Read more

Copper, the re-export factor

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