Continued from Part One.
Yet in one location alone, Vlissingen in the Netherlands, the flow of metal into and out of LME sheds for stock financing has already totaled 1.14 million tons this year. In Home’s opinion, it’s probably fair to say that not one ton of this metal’s flow is going to a manufacturer.
But if the market is in surplus, as analysts suggest (the World Bureau of Metal Statistics put the surplus at nearly 600,000 tons for the January to May period this year, although down from the same period last year), Reuters suggests there can be but two reasons why premiums are rising so fast and so far.
Either demands from the financial sector are increasing, or physical supply is contracting and has not shown up in a measurable way. The financial stock and finance model has been around for years and there is no evidence to suggest demand has recently increased, so could it be supply is finally becoming constrained?
Primary producers certainly have an incentive to sell as much metal at spot as they can, with a $250/ton premium being enough to lift some from loss to profit on each ton sold. Reuters suggests production outside of China has fallen by around 1.2 million tons annualized since the fourth quarter 2011, a more realistic figure than Rusal’s 4.5 million tons, and if correct could be enough to bring the market almost into balance. Last year’s surplus was put at 1.74 million tons by the WBMS, but consumption was rising faster than production.
Further evidence of stress can be seen in the LME forward curve. The strength of the forward curve underpins the whole primary metal stock financing business, although finance periods are typically 18 months+. As an example, the 3-month premium was recently $41/ton; today it is below $23/ton.
The market has signaled the end of the stock financing game numerous times in the past and we are not about to do so again here. Of more concern to us is if and when the growing physical tightness is going to exert an upward influence on the LME price.
Everyone agrees it is untenable at current sub-$1,900/ton levels in the longer term — but are physical premiums rising to unprecedented levels and a flattening of the forward curve the first signs of a rise on the way?