Friday, June 7, 2013

Want to Get Copper Out of the Warehouse? Pay a Premium (there's $3.75 mil per day being made)

This little stroll into the weeds was prompted by the declaration of force majeure by China's #3 copper producer and the ridiculous premiums extorted to get metal out of warehouses.

note: the $3.75 mil. is only the warehousing rent, it does not include metal leasing income.

From Bloomberg May 30:
At a time when copper stockpiles are rising to the highest in a decade, manufacturers are paying the biggest premiums for the metal in as much as seven years as financing deals lock up supply and extend lines at warehouses.

While inventories tracked by the London Metal Exchange more than doubled in the past year and supplies exceed demand for the first time since 2009, getting copper is becoming more expensive and taking longer. Buyers in Shanghai pay $135 a metric ton more than LME futures, up from $55 last year, Metal Bulletin data show. Luvata Malaysia Bhd., a circuit-board parts maker, stopped buying from local LME stockpiles after waiting times rose to three months from three days at the start of 2012.

Manufacturers may not be reaping all the benefits of the 28 percent slump in prices since they reached a record two years ago because the financing accords are curbing access to metal. As much as 30 percent of LME-tracked reserves are tied up in the agreements, Societe Generale SA estimates. About 84 percent of stockpiles are now concentrated in three locations, lengthening lines just as supply from mines is constrained by disruptions including port strikes in Chile and a landslide in Utah.

“Premiums are up, and they’re up substantially,” said Rodney Kent, chief executive officer of Camden, New York-based International Wire Group Holdings Inc. (ITWG), which had sales of $734 million last year. “You used to be able to clear an order and get an off-take in a matter of days, and now it can be a matter of months.”...MUCH MORE
Back in early May Diarmuid O’Hegarty, COO of the LME said:
...“The new warehouse owners bought into the warehousing business because they saw a profit opportunity, and a very good one at that. There is currently around $3.75 million of LME rent to be earned every single day. The question became, how could a warehouse acquire a significant part of this income in the most efficient manner?

‘‘If the minimum load-out rate mandated by the LME was to be interpreted as a maximum load-out rate by the warehouses, they realized that a sufficiently large queue of canceled warrants would effectively create a dam against the delivery of material from warrant. Just like a water dam, the warehouse dam would allow a trickle of metal out, but the reservoir of material behind the dam could be replenished and increased by the delivery of further material into warehouse.’’... 
Izabella Kaminska at FT Alphaville has been writing tutorials on the warehouse games for the last couple years. Here's her latest:

The rise of the real collateral ‘mining’ business
FT Alphaville was cordially invited to talk about the collateralisation of commodities at two separate conferences this past month. We thank IHS Global and the Association des Economiste Quebcois for the opportunity.

The crux of our argument was that you can’t really understand what’s going on in commodity markets unless you appreciate that commodities are no longer a pure consumption-based market.
More to the point, that marginal prices are increasingly being dictated by the market’s alternative collateral, store-of-value, and safe-asset role in the global economy. This is being fuelled by a general scarcity of quality collateral in the market.

For those interested, a copy of our presentation slides can be found here.
To summarise the key points:
  • The market has under-estimated the degree to which commodity producers, by means of collateral manufacturing, have been propping up commodity prices the past five years.
  • Collateral manufacturing refers to the distinct production of commodities to cater to the demands of the financial sector, rather than to real consumable physical demand.
  • In some way, commodity producers have been playing the role of property developers in what might otherwise be described as the subpriming of commodities.
  • Just like property developers in the naughties, commodity producers have been producing commodities in response to demand that would not be there if not for subsidisation by an investment class keen to overpay for exposure to the asset class.
  • The only differences are that property developers produced homes which could be used usefully even as they served as collateral for a new breed of securitised investment. The second is that when it came to real-estate backed securities, investors sought them out for the higher yields they offered because of the fact that government bonds yields were yielding so little. Investors in this case, were not really taking a punt on house prices themselves. Although the boom they created did lead to other speculative housing market behaviour on the sidelines.
  • It is our hypothesis therefore that when 2008 happened, and safe yields were obliterated and a scarcity of safe collateral began to plague the market, a great amount of money started seeking out an alternative safe asset....