LME

As if to underline just how much of the recent froth in commodity prices has been speculative, it took nothing more than a tightening of rules to bring the market off the boil.

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Iron ore, steel and non-ferrous metal markets in China — and by association the London Metal Exchange after opening — dropped following a decision by futures exchanges in Dalian, Shanghai and Zhengzhou to increase trading margins and fees. The most-traded contracts were down up to 4.6% in response.

Some Commodities Are Actually in Short Supply

Not all commodities dropped. Some experienced genuine supply tightness, such as coking coal wherein many of the domestic mines and ovens closed last year due to low prices, and bucked the reversal. Coking coal continued to rise and although iron ore did fall back. The fundamentals are a little more supportive following announcements by producers that they will limit output, but, in truth, even iron ore’s price increases are more due to speculative bullishness than a genuine tightness of supply. Read more

The London Metal Exchange‘s Hong Kong owners have seen revenues soar for the venerable metals exchange and Vale SA and BHP Billiton may have reached a deal with the Brazilian government over the deadly Samarco mine disaster.

LME Revenue Soars

The London Metal Exchange posted a 36% jump in revenue for 2015 to $223.15 million, as higher trading fees and tariffs helped it offset a drop in volumes, its owner — Hong Kong Exchanges and Clearing  Ltd.— said on Wednesday.

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The revenue gains at its London unit were a key contributor to HKEx record net profit last year, showing the payback has begun from its $2.2 billion buyout of the 139-year old metals exchange near the height of the commodities boom in 2012.

Samarco Owners Reach Deal With Brazil

Samarco Mineracao SA will pay at least $5 billion over 15 years as part of a deal reached with the Brazilian government to settle a lawsuit for damages caused by a deadly dam spill at a mine in November, a government source told Reuters on Tuesday.

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Samarco, a joint venture between Vale SA and BHP Billiton, will pay 4.4 billion Brazilian reais in the three years following the agreement that is expected to be signed today.

 

Both OPEC and LME are dealing with unexpected price stability this morning.

Oil Output Falls

Organization of Petroleum Exporting Countries oil output has fallen in February from the highest monthly level in recent history, a Reuters survey found on Monday, due to a halt in Iraq’s northern exports and outages in other producers.

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The survey also found stable output in top exporter Saudi Arabia, an early sign that Riyadh is delivering on a Feb. 16 deal along with Venezuela, Qatar and non-member Russia to freeze output and support prices, which hit a 12-year low last month.

LME Rents

The London Metal Exchange on Monday confirmed that it will explore the idea of capping warehouse rent because the proposed rises from April are much higher than in previous years.

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The LME said it plans to publish a discussion paper outlining its options on “Charge Capping” in mid-March. “The LME is proposing, at a minimum, to explore the possibilities for implementing a longer-term solution to high charges.

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.

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.

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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

The London Metal Exchange (LME) today launched its first new contracts in more than five years. LME Aluminum Premiums, LME Steel Rebar and LME Steel Scrap, are the new contracts.

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“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.

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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.

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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.

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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.”

 

BHP Billiton‘s CEO called for more free trade and zinc has been quietly building in New Orleans.

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Mackenzie Supports Free Trade

Issuing what he described as a “call to arms” to global business, Andrew Mackenzie, chief executive of BHP Billiton, said he was concerned that non-tariff barriers to trade had grown since the 2008 financial crisis while finance and insurance had become more “insular.”

What’s With All the Zinc in New Orleans?

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.

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Moreover, open tonnage of 553,075 mt is now at the highest level since December last year.

 

Earlier this week the London Metal Exchange announced 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.

US dollar vs. RMB

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.

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 Lisa: Why do you think the LME made this move?

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 Clearing Group (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

The London Metal Exchange is treading cautiously in making rule changes to the way its warehouse system works.

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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.

Legal Challenges

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.

aluminumingots_500

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.

Load-Out Reform

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.

Rent Capping

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.

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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.

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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 aluminium bricks waiting for transport to the factory

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