Thursday, April 11, 2013

Playing the LME Copper Warehousing Game: New Loadout Rules May Have Increased Financing Deals

Over the last few weeks Reuters has at least three solid reports on the shenanigans in the copper market.
March 22, 2013
Glencore fills Malaysia's Johor warehouses with copper
* Copper stocks in Johor jump 800 percent since Dec
* Glencore offers $80-$100/tonne to attract metal-sources
* Seeks to lock up metal to generate rentals-sources
Commodities trading house Glencore is shunting more of the world's surplus copper into the Malaysian port of Johor, extending a strategy to lock up metal to earn lucrative warehouse rentals and premiums, industry sources say.
Copper stocks at Johor have surged more than eightfold since December and now account for a fifth of total copper inventories monitored by the London Metal Exchange (LME).

Johor is a good location to isolate metal since the port is less accessible than nearby Singapore and it is not an area of strong copper consumption, meaning inventories are likely to remain longer and provide better rental income to the owners, the sources added.

In part, the rise reflects a growing surplus of stock as mine supply growth outpaces demand this year and swings the global copper market out of several years of deficit.

Copper stocks in Shanghai and LME warehouses are the highest in about 10 years, and bonded stocks in Shanghai near records....MORE
That was followed by:
Apr. 8, 2013
Playing the new LME warehousing game

The London Metal Exchange's new warehouse load-out rules came into effect at the start of this month.
In essence they compel warehouse operators to load out a minimum amount of each exchange-traded metal irrespective of the length of queue for any particular metal.

Where there is a "dominant metal" queue of over 30,000 tonnes awaiting load-out, warehouses will now have to ensure minimum deliveries of 500 tonnes per day for other metals "provided that such deliveries are requested". As far as it goes, it is an eminently logical move. It brings contracts such as copper, zinc and lead into  line with tin and nickel, already the subject of minimum load-out requirements of 60 tonnes per day. It also averts a potential repeat of the LME Copper Committee's draconian decision to delist a good-delivery location, Vlissingen, for fear of copper becoming trapped behind a queue of aluminium. But make no mistake. This is a palliative, not a solution to the underlying problem of warehouse queues....

Goldman initially seems to have seen Metro purely as a counter-cyclical revenue play. After all, by mid-2011 each tonne in the cancelled warrant load-out queue in Detroit, assuming it was on maximum rental as is normal for cancelled warrants, was generating in excess of $60 in revenue. And that without factoring in the fixed-rate load-out charge.

But something else started happening as well. The LME warehousing system is where financial market meets physical market and physical premiums in the U.S. started gravitating up towards both the implied cost of getting metal out of exchange warehouses and the incentives being offered by Metro based on that cost.  
The combination of assured storage rental and the leverage offered over physical market premiums attracted the attention of other players, particularly those such as Glencore and Trafigura, for whom physical arbitrage is the bedrock of their business model....MUCH MORE
And on Tuesday:

LME warehouse rule may have raised copper financing deals
The London Metal Exchange's warehouse load-out rule change may have increased the amount of copper locked up in financing deals, the exchange's chief executive said on Tuesday.

In an April 1 rule change, the LME stipulated that storage sheds with big queues of one metal waiting to be delivered out must start loading out other so-called "non-dominant" metals separately at a rate of 500 tonnes per day. The move was aimed at cutting queues for metal stuck behind aluminum.

An inadvertent effect of the new rule though has been that copper is leaving warehouses more quickly than ever only to head into rival facilities as part of financing deals that have dominated the LME's warehousing network for the past several years.

Using cheap financing due to low interest rates, traders agree to store their excess metal in long-term rent deals and sell it forward at a higher price due to a healthy forward prices spread. These deals are known as cash-and-carries....MORE
This is creating an opportunity for the CME (It's On Biatch! CME Looks to Chile Warehouses In Copper Battle With LME) who, if they're smart will at least consider the industrial user.

If they're not smart I can foresee the end-users setting up something akin to the Silver Users Association.
(bet you never heard of that one, eh? just one of the things that makes the silver market so opaque)