The London Metal Exchange (LME) launched three new contracts this week — LME Aluminium Premiums, LME Steel Rebar and LME Steel Scrap, the first new contracts to be offered by the Exchange in more than five years.
You can now hedge aluminum physical delivery premiums using an LME contract. Source: iStock.
The two steel contracts are cash-settled against physical Turkish scrap and rebar price indexes as opposed to the current steel billet contracts that are settled by physical delivery and have largely proved to be a failure since launch.
Why, we might ask, would these new contracts prove anymore successful? Well acknowledging the failure with billet, the LME has worked assiduously to garner industry support both in the shaping and specification of the new contracts. Goldman Sachs, for example, is on the LME’s steel committee and major trading firms like Stemcor have publicly stated they intend to be actively involved from day one, although they still add the caveat “subject to market conditions and liquidity.”
Liquidity was always a major issue for the billet contract. It never secured anywhere near enough interest from the trade to generate sufficient volume and, hence, a fair market price.
Rebar and Scrap
The steel scrap and rebar contracts will be traded on LME Select in small lots of just 10 metric tons making them more accessible for smaller market players, while, at the same time, the LME is offering discounts for volume trades to encourage liquidity. Read more
“Today’s announcement highlights the LME’s new approach to market engagement,” said Garry Jones, CEO of the LME. “This has been an extremely customer-focused product launch, and we have collaborated with participants throughout the metals value chain to ensure we have created contracts that people want to trade.”
The new scrap and rebar contracts will be traded on LMEselect, allowing industry participants to reduce their risk exposure by hedging more steps in the steel production process. The contracts are cash-settled against physical Turkish scrap and rebar price indexes.
The new ferrous contracts will be supported by market-making programs to optimize market depth and tightness of spreads.
With the physically settled aluminum premiums contract, participants can now hedge the regional all-in price to ensure the metal they receive is readily available in a non-queued LME warehouse at a convenient location
Mints have begun rationing sales of silver coins as supplies dry up due to low, low prices and the London Metal Exchange is set to launch its first contracts with position limits.
Silver Coins Running Low as Prices Fall
The global silver-coin market is in the grips of an unprecedented supply squeeze, forcing some mints to ration sales and step up overtime while sending US buyers racing abroad to fulfill a sudden surge in demand.
The US Mint began setting weekly sales quotas for its flagship American Eagle silver coins in July because it can’t meet demand, and the Canadian mint followed suit after record monthly sales in July. In Australia, the Perth Mint sold a record of more than 2.5 million ounces of silver this month, nearly 4 times more than in August, and has begun rationing supply of a new line of coins this month, a mint official told Reuters.
LME Premium Contracts Will Have Position Limits
The London Metal Exchange‘s new premium contracts, scheduled for launch in November, will come with position limits, a first for an LME contract.
Reuters’ Andy Home writes that the LME is proposing to give itself the authority to introduce position limits “as a general power rather than a power specific to premium contracts.”
With an eye on looming, broader regulation in financial markets, that represents a major shift in the way LME trading has been regulated. Position limits have long been anathema to a market that, as Home writes, “has come to epitomize Britain’s light-touch oversight of wholesale markets.”
The latest stocks report from the London Metal Exchange showed another 26,600 metric tons of zinc being warranted at the port of New Orleans.
That brings the cumulative inflow to a massive 228,225 metric tons since the start of August.
The deluge of metal has transformed the LME zinc stocks landscape, Reuters’ Andy Home writes. The total hit a low point of 426,875 mt on Aug. 6, at which stage exchange stocks were down by almost 264,000 mt, or 38%, on the start of the year. As of today that year-to-date decline has been slashed to just 73,500 mt.
Earlier this week the London Metal Exchangeannounced that its clearinghouse would now accept offshore Chinese renminbi as collateral, effective immediately. MetalMiner Editors and Co-Founders Lisa Reisman and Stuart Burns discuss the significance of this announcement but more important, its potential impact on industrial buying organizations.
For the first time, the LME will accept renminbi as collateral.
Lisa: Do you think this could mean that eventually metals are offered in a currency other than US dollars?
Stuart: I think that is still some way off for the main London market but the HKEx has run RMB-priced Asian mini metals markets for aluminum, zinc and copper since late last year in Hong Kong. This announcement by the LME now is about collateral placed by market participants for open positions. They are not suggesting London contracts will be priced in RMB.
Stuart: On one level there is the recognition of the RMB’s growing importance as an international (although we’d like to point out, not freely traded) currency and of China (and Chinese companies) importance as a major player in the global metals markets. On another level, it could also be seen as a political move. The LME is owned by the Hong Kong Exchanges and ClearingGroup (HKEx) and the key to unlocking fair value in their purchase of the LME was always their ability to open up China as a market for the LME’s services. Anything they can do to make the LME more accessible and more acceptable as a trading platform for Chinese companies is a beneficial step in that direction. Read more
Part of the reason is to be found in that phrase, particularly “warehouse system.” Independent operators run the warehouses; they are licensed or approved by the LME but they are not owned by the exchange. In addition the warehouses are located in different continents, in multiple legal jurisdictions and changes permissible at one may be considered illegal in another.
To add further complication, the legal challenges to rule changes in the past have come from primary producers such as UC Rusal and end users such as MillerCoors and Coca-Cola. So, the LME moves cautiously. This week’s announcement of an industry-wide consultation is to review two proposed changes that the exchange hopes will both increase the decay of existing queues and prevent the build up of new ones.
These aluminum ingots just want to leave Detroit an Vlissingen.
The first is to increase the minimum load-out rate warehouse operators are obliged to achieve, the minimum, as considered by some operators, is the maximum and they believe it is set far too low. For operators holding more than 900,000 metric tons of metal, they are currently loading out only 3,000 mt per day, yet the same warehouse will take IN tens of thousands of tons.
The new minimum daily load-outs proposed for warehouses storing between 150,000 mt and more than 900,000 mt range between 2,000 mt and 4,000 mt a day, scaled according to the amount of metal stored. It’s hardly a transformational change as the two remaining warehouses with extended queues are still potentially out to a year on a 3,000 mt/day minimum.
According to Reuters the LME’s warehouse report shows queues to load out at Vlissingen, Netherlands, were 365 days in May and at Detroit were 387 days. With rents at these warehouses on average about 0.50/mt per day, that remains a massive financial burden for metal owners waiting in the queue. The change will do little to reduce delays in the short term.
Of more significance is the move to cap rents for metal while it is in the queue. This is a suggestion we have long held as being the most practical to implement and the most effective to encourage early load out. If operators do not receive rent for metal in the queue, they will work to remove it as quickly as possible and replace it with metal they can earn rent on.
Specifically, the proposal reads warehouse companies that fail to deliver out-queued metal within 30 calendar days would be required to halve the maximum published rent charged to the affected metal owners. After 50 calendar days, no rent could be charged at all. It’s still a far cry from when I started in the trade and we could take physical delivery in 48 hours, but 30 days is better than 300.
So, some tough changes for the warehouse operators then? Well, no, not really. For one thing, 90% of LME warehouses do not exhibit any queues, so changes will not make any difference to them, and even for the two remaining problem locations — Detroit and Vlissingen — the changes are not going to be introduced before next May, by which time their queues will have decayed to no more than about 50 days based on current trends.
The changes will, however, inhibit the build up of new queues if the stock and finance trade roars back. For the time being, the physical delivery premiums have fallen back to “normal” levels and the market shows no signs of the shortages that could drive competition for metal, but the LME’s forward curve for aluminum does support the return of the stock and finance trade. The difference now compared to 2010-12 is the use of off-market rather than LME warehouses for the trade. Let’s hope the combination of rules and trade changes combine to avoid a repetition of queues in the future. The LME changes are a step in the right direction.
My colleague, Jeff Yoders, referred last week to action taken by Alcoa, Inc. to challenge the Commodity Futures Trading Commission (CFTC) over its involvement in the London Metal Exchange’s (LME) upcoming rule changes.
The LME is in the process of a long running review of it’s warehouse rules following industry criticism of the length of queues, particularly at it’s Detroit and Vlissingen (Netherlands) warehouses, a situation that was initially viewed as driving up physical delivery premiums. It has since been seen to be only part of a wider problem created by the stock and finance trade’s competition for physical metal.
Pile of aluminum ingots stuck in Detroit, even though its owners want to take delivery.
Queues have declined in nearly all locations but still remain at upward of a year in Detroit and Vlissingen, although Metro International and Pacorini, the warehouse operators at those locations, have taken steps to further limit intake while the LME’s deliberations are underway. Read more
Asia has led the fall due to weakening regional demand and a flood of Chinese semi-finished products hitting the market. In part, some of this Chinese material is said to be destined for re-melting and, as such, is replacing primary ingot sales in the region but our belief is this is limited, as much by economics as anything.
Exchange Prices Nearing Parity
The Shanghai Futures Exchange metal price is not at such a discount to that of the London Metal Exchange to make the re-melting/reselling trade even profitable.
The three-month aluminum price on the London Metal Exchange is back below $1,800/metric ton. In April, aluminum rallied with most industrial metals thanks to a weaker dollar. However, in May the dollar bounced back up, unwilling to give up more ground, hurting industrial metals.
LME 3-month aluminum price 1 year out
Aluminum prices are now hanging near previous troughs. If the dollar continues to rally, we would expect aluminum prices to hit record lows this year.
Same story with nickel. The metal rallied in April after hitting its lowest level in six years, but in May, nickel also fell and is now near that record low. As with aluminum, a stronger dollar would put nickel prices into a tailspin. Read more
The London Metal Exchange (LME) yesterday launched a month-long consultation on proposals designed to broaden access to its electronic trading platform, LMEselect. The changes put forward include opening up LMEselect access to category 3 and category 4 (non-clearing) members of the exchange as well as adding flexibility to the criteria required to apply for LME membership.
“Today’s proposals are crucial to our overarching aim to maximize liquidity and participation on the LME,” said Garry Jones, LME CEO. “Opening up access to trading on LMEselect is beneficial to everyone trading on any one of our venues as it will bring more liquidity and price transparency to all.”
Adding flexibility to the application criteria for LME membership means that prospective members may, in some cases, benefit from exemptions from the UK Financial Conduct Authority (FCA) authorization requirements, which represents a significant step in the LME’s Liquidity Roadmap. The changes would make the LME electronic market more attractive to non-UK based traders who want to take advantage of the Exchange’s enhanced liquidity initiatives but who are currently not eligible or are discouraged from applying by electronic access restrictions.
If the LME decides to proceed with the proposed changes after the consultation period ends, then full details of the category 4 membership requirements including fees and B share requirements will be published.