LME now reporting off-warrant stock … what does it mean for the market?

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Despite being in the works for months prior to the onset of the pandemic, the LME’s program of reporting warehouse inventory in “near storage” — meaning in LME warehouses but not on warrant — could hardly have been more timely as a fierce, if temporary, recessionary situation hit metals markets this year.

Born out of criticisms made about load-out queues after the last recession, Matthew Chamberlain, CEO of the London Metal Exchange, advised in an interview with MetalMiner late last week that the market had been crying out for greater transparency into metal that was not in the LME system but had the potential to be delivered at short notice.

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There has always been a sense of unease as to what positions are out there but unseen — that is, metal that could be delivered at a moment’s notice onto the LME and, hence, upset prices.

Largely, that was positions sitting in warehouses owned by LME warehouse operators but not currently on warrant. This metal has always had the potential to upset the market with unexpected overnight deliveries.

But following the new off-warrant reporting program, dealers and the trade will now have visibility on these positions.

As Chamberlain pointed out, there are limits to what can be achieved.

This first stage requires warehouse operators to report daily on off-warrant positions alongside warranted inventory – and for those interested in the positions, the geographic distribution and volume changes make interesting reading here.

Not surprisingly, off-warrant stocks broadly mirror exchange inventory (at least for aluminum, the largest single metal traded, with the Far East holding the lion’s share).

Interestingly, though, Detroit has nearly doubled in recent months, maybe a reflection of the return to normal Canadian import volumes following the recovery of the Bécancour smelter, just as the pandemic lockdowns decimated demand this spring.

Further down the line, it is hoped a voluntary scheme will encourage holders to report metal held in non-LME warehouses by offering the incentive of lower warranting fees in the future (should the holder want to deliver metal onto the exchange at a later date).

Unfortunately, there are limits to what can be achieved.

Visibility into the opaque financial markets inventory, the so-called stock and finance trade’s growing store of metal, will remain for now more like guesswork.

The LME applies a reasonableness test as to what data it can realistically secure and report. Current potential physical users who may use the LME as a backstop delivery point in the future have a vested interest in its robust operation and can be incentivized to participate, but this will always be a subset of the wider inventory held.

Metal that is held in non-LME warehouse locations or is intended to be traded on non-LME exchanges, such as in China, will remain unreported.

But as media reports have advised, primary aluminum mills from Canada to Russia have shifted their production focus during the pandemic to more commodity P1020 grades that can be delivered as a last resort onto the LME. Not all this metal has been soaked up by the stock and finance community  — some, as the LME reports from February onward show, has made its way into LME warehouses but not yet been warranted. Visibility on these positions makes for valuable insight in a dynamic market like aluminum.

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There is no guarantee the new reports will meet with universal acclaim.

Metals exchanges, however, like stock and foreign exchange markets, thrive on data: the more transparent they are, the more fairly they operate for all.

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