Have you every wondered what those practicing the dark arts of arbitrage are up to? It’s an often-used phrase but not many of us have actually bumped into someone who owns up to be an arbitrager. In plain terms an arbitrager seeks to take advantage of disparities between two markets that historically have shown a close correlation. So for example New York Comex copper and London LME copper prices would normally move in close correlation. If they get out of sync arbitragers will sell one and buy the other in the expectation they will return to equivalence. Well markets like New York and London copper move so closely that the margins remain thin. Playing such differences as appear in such a highly liquid market provide limited opportunities so these clever chaps have long since moved onto more lucrative arenas. The objective remains the same but seeing the differences as they develop and being able to match them to a historical norm takes a little more insight.
MetalMiner has developed a pretty clever index based on hundreds of price points around the world, updated daily and reporting metals prices impacting a wide spectrum of industries. Curiosity got the better of me this morning and playing with LME base metals prices during the month of June I ran a correlation with Chinese domestic base metals prices over the same period fully expecting a close correlation within fractions of a percent. Surprisingly this was not the case. While base metals everywhere have come off in the month of June they have come off more on the LME than they have in China. For example aluminum fell 4.26% in RMB from June 1 to June 27 but the LME fell 8.05% during the same period. Zinc fell 3.30% in China compared to 5.79% on the LME, whereas tin fell 3.24% compared to 5.93%. The largest disparity involved lead, which fell only 3.14% in China but 8.20% on the LME.
Aah you say, maybe exchange rates are to blame? Good point, I thought of that too, but converting RMB prices to USD at the rate prevailing on the day of reporting shows aluminum prices in dollar terms dropped 4.17% rather than the 4.26% above, a miniscule difference.
Grounds here for arbitrage wizards to track the correlation and exploit divergences? Probably, maybe they are already at it, but more to the point access to such data allows metals consumers in the US to track the raw material costs of their Chinese suppliers (and the IndX doesn’t only track Chinese prices of course) and either take avoiding action if local price trends start moving against them or advantage if price trends move in their favor. Knowledge is power the saying goes. Well hasn’t that always been the case in the metals markets?