I'm tempting the fates aren't I.
Well, this blog isn't exactly BusinessWeek 1979 and besides, the Death of Equities cover was actually smart advice for the three years to August 1982.
Anyone in the commods has to have been scared of the long side this week. From the grains collapsing on the hint that corn yields would be a little bit better than the apocalyptic famine scenarios being pitched to the dentist in Peoria trying his hand at corn futures to the 2.2% drop in October platinum on news of the Lonmin settlement to Monday's massive "Holy air pocket, Batman"* selloff in the oil pits** it appears that folks (and 'puters) are so skittish that they dump contracts as if they cause cancer.
So what's going on?
There appears to be a lot of physical stuff in the world and producers and merchants know it.
Here's one part of the puzzle, from FT Alphaville's Izabella Kaminska:
Commodity encumbrance and Joseph’s storage play
It could be that a major commodity story is about to go mainstream.
We are, of course, talking about the issue of financialised commodity inventory and the impact it has had on the supply and demand picture, by taking inventory off-market and off-balance sheet.
Last week Oleg Deripaska revealed his concern over the financialisation of physical aluminium. He called for output cuts, effectively to take the place of funded “dark” inventory, in order to bring the market back to equilibrium.*The holy air pocket line was from Tudor, Pickering, Holt.
Then Reuters reported at the weekend that Chinese banks and companies –which had tried to seize commodity collateral which had been pledged for loans, now defaulted upon — had found the metal in question never existed.
This, they noted was the case of “ghost inventories”:
Chinese authorities are investigating a number of cases in which steel documented in receipts was either not there, belonged to another company or had been pledged as collateral to multiple lenders, industry sources said.Now on Wednesday we have the following story, also from Reuters, describing similar goings on in the lead market...MUCH MORE
Ghost inventories are exacerbating the wider ailments of the sector in China, which produces around 45 percent of the world’s steel and has over 200 million metric tons (220.5 million tons) of excess production capacity. Steel is another drag on a financial system struggling with bad loans from the property sector and local governments.
** If I had to guess I would say it was a major oil producer. You don't dump 13,000 WTI's and 10,000 Brent's in under a minute unless you can deliver if needed.
Combined with "Saudis offer extra oil to offset price rises" (FT) and it's not hard to understand why, after getting above $100 on Friday, WTI is now at $92.96.
I repeat, there is a lot of "stuff" available for sale and until some sort of equilibrium is reached QE3 will not be enough to offset supply.