--Morgan Stanley analysts predict the end of metals financing deals
--Higher interest rates will reduce profitability of metals-financing deals
--Proposed changes to LME storage rules will reduce inventory logjams
By Tatyana ShumskyAnd from MacroBusiness:
NEW YORK--Morgan Stanley (MS) says the writing's on the wall for warehouse trades.
Two things have allowed massive amounts of metal to build up in London Metal Exchange-licensed warehouses: low interest rates and the exchange's warehouse rules.
Both factors are on their way out, Morgan Stanley said in an analyst note Monday, so "the long-awaited demise of inventory financing deals in a number of LME-traded metals appears to have arrived."
Cheap financing allowed banks and commodity traders to borrow money at little to no cost while benefiting from the gap between low immediate-delivery prices and higher futures prices. Traders would use borrowed money to purchase metal on the physical market, put it into a warehouse, and sell it at a higher price on the futures market, locking in a risk-free profit....MORE
...The Federal Reserve has signaled its plans to taper off the $85 billion-a-month bond-purchasing program as soon as this year.
This "marked the first step towards an environment where yield spreads between physical commodities and financial instruments became sustainably less favorable," Morgan Stanley said....
Bank commodity hoarding to end?
Find below an excerpt from a fascinating Morgan Stanley study of the global supply of commodities by investment banks. Nice job if you can get it. Trade the commodity and control the supply. Rent-seeker 101.HT on the MS note at MacroBusiness: FT Alphaville
The long-awaited unwinding of inventory financing and trading deals in LME metals appears to have begun, in our view. Ultimately, we expect a number of wash-back effects, the most important of which are likely to be renewed price pressure on aluminium and zinc, as well as second-order effects on some feedstock prices such as alumina. We think copper prices should escape any significant near-term pressure, but more ready access to metal over time could be negative as supply increases.
Recent developments driving change: The combination of the recent increase in regulatory scrutiny of Financial Holding Companies (FHC) participation in physical commodity businesses, changing LME rules on warehouse load-out rates, and rising global interest rates has focussed market attention on the possible demise of warehouse-based trades. This story has its roots in three developments since the Global Financial Crisis of 2008-09: 1) An extended period of very low interest rates and unconventional monetary policy via Quantitative Easing (QE); 2) the rapid consolidation of LME warehouse ownership and the subsequent geographic consolidation of metal in warehouses, and 3) increased regulatory oversight of FHCs in the US following bank failures and the injection of large amounts of taxpayers’ money in 2008 amid increased concern about systemic risks to the banking system.
Origins in the Global Financial Crisis
To appreciate the significance of changes that are under way, it is worth recalling that the factors now heralding important changes in the physical metals trade and warehousing businesses of the LME have a common origin in the Global Financial Crisis of 2008-09....MUCH MORE
