Should Metal Buyers Care If Lead Goes Into Backwardation?

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Continued from Part One

Total registered tonnage of lead in Europe today stands at 101,025 tons, of which 60 percent, or 60,575 tons, is in the form of canceled warrants. The ratio in Spain is 85% and that in Italy is 95%. Where it is going remains a mystery, but Reuters points the finger at Glencore and pointedly reveals that the trading house has some 45 percent of the non-producer marketplace for lead, an already potentially dominant position.

Whether the party behind the squeeze is Glencore, or one of the other LME members accused of similar practices in recent years such as JP Morgan, may come to light when the metal is physically moved. Glencore owns Pecorini and JP Morgan owns Henry Bath warehousing — the logical destination will be one of their own warehouses.

Interestingly, no lead warrants have been canceled in Vlissingen, where Glencore’s Pecorini owns 27 of the 29 LME-registered warehouses.

So should we care if the lead market goes into backwardation? Yes, absolutely we should. The LME is supposed to be a market of last resort where suppliers and consumers can turn in times of need, and even more importantly, is supposed to provide a fair market price that reflects the balance of supply and demand in the market.

Lead consumers with contracts tied to the LME settlement prices are paying a premium for metal over what would be considered a normal state of affairs for a market in balance. If major market players are allowed to corner the market and manipulate the price by restricting availability, then how can the LME be said to be providing a fair and transparent market price?

The probability that the major market player in question is a member of the LME itself possibly explains why the organization tolerates the situation.

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