It would seem we are not alone in believing the current LME warehouse regulations, specifically regarding load-out rates, are distorting the market.
A recent Reuters article covered a report carried out by the Brussels-based Centre for European Policy Studies and the European Capital Markets Institute, whose views often feed into debate within the European Commission, the EU executive body. This is the result of big industrial firms like aluminum recycler and producer Novelis lobbying the LME and EU authorities to take action, saying the delays cause a scarcity of physical metal, and distort prices for prompt metal delivery.
Delays in out-loading add to costs, with storage charged at roughly $160 per ton per year, according to the article. “It’s pretty clear that part of the queues are artificial,” Diego Valiante, one of the report’s authors, is quoted as saying.
Interestingly, in a flurry of activity since the LME’s own review of loading rates was announced last month, the forward-dated market has responded, according to a note to investors from Standard Bank.
The note reports the aluminum forward curve has tightened markedly since July 1, with much of the movement occurring in the December 2013 to December 2014 spread and even farther forward out to Dec-15 and Dec-16.
One aspect of the changes is a worry that if warehouse companies do not load out fast enough, they may be restricted from issuing new warrants for fresh deliveries. That would prevent investors such as banks, hedge funds and traders from delivering metal stored outside the LME onto warrant to meet short positions.
The bank notes that looking at the volume of spread activity that has gone through since July 1, December 2013 to 2014 turnover has surged. From an average of 522 lots/day in the preceding 2 weeks, volumes surged to about 1,840 lots/day since July 1, with 4,520 lots of Dec-13/Dec-14 trading on July 1 alone. This suggests that an additional 230,000 tons of metal has been rolled forward on top of “normal” activity since the LME announcement.
With the LME’s review set to conclude by Sept. 30, this situation is clearly set to run and run. Clearly the distorting effects have spread widely throughout the market, encouraging activity and position-taking both positive and negative as regards impact on metal price.
The full ramifications of this could be even wider still.