We continue our Q&A with Stuart Burns, co-founder of MetalMiner (not to mention a 30-year veteran of the aluminum market and former trader), to see how he responds to some recent Goldman Sachs statements, in italics. Read Part One here.
MetalMiner: “After inventories had grown in the warehouses, many market participants sought to retrieve metal primarily for the purpose of implementing new carry trades at warehouses outside the LME system, which offered lower storage rates. This resulted in the creation of the queue.”
In your opinion is this the causal reason for the queues? Why or why not?
Stuart Burns: This has contributed to the queues, certainly, but slow load-out rates are the primary cause; if load-out rates were higher, the metal on warrant would have left the LME system by now and gone into off-market storage. Much aluminum has [done so], but much remains.
MM: In terms of suggested changes to the system, Goldman Sachs proposed several things. The first change involves Goldman saying they are “supportive of recent LME proposal to reduce queues.” Okay, that’s kind of like an “Oh, duh.” Why has this been so difficult to gain consensus on before? Why is the LME still struggling with just changing the rules? Is it because the ring traders like Goldman are opposed to it? Is this an issue wherein everybody has a vested interest?
SB: Those are all good questions, and ones to which we can really only speculate. You have to think the LME and the major warehouse companies (and/or their owners) are too close to each other. I am not suggesting out-and-out collusion to manipulate the market, but simply blinkered vision that certain changes being envisaged now were considered too disruptive just a few months ago. It’s only outside pressure that has brought about a consensus that something needs to be done. Left to their own devices, the system would not have been changed.
MM: “We suggest that the LME establish a system to prioritize consumers so that they always have access to a minimum load out rate for end users.”
Isn’t it true that most consumers have left the system long ago because their metal wasn’t prioritized? Will this be enough to entice consumers back? Or will Goldman get to say “See, this didn’t fix the problem” two years down the road?
SB: Yes, consumers, certainly those in the US, largely abandoned the LME some time ago as being unworkable. But the problem isn’t consumer access. MillerCoors, Coca-Cola and others are not really arguing they want to access the LME for metal supply. The problem is that the premium paid for physical delivery of metal to LME warehouses has distorted the market. It has pushed up the MW premium from a “normal” level of about $100/ton to a current level of about $260/ton. At an LME price of about $1,800/ton, that is a huge percentage of the raw material price that processing consumers cannot hedge and find hard to pass on to end users. To be fair, some of this premium would probably still exist with or without slow LME warehouse load-out rates – it is in part a function of the whole stock and finance model, but the LME load-out rates are contributing to it. Everyone in the market downstream of the smelters suffers from this distortion – the inflated physical premiums, pretty much regardless of where they source their metal from.
We conclude in Part Three right here.