Tuesday, September 29, 2015

"Are banks behind energy and metals price swings?"

Speaking of finance, we heard yesterday that GLEN was being asked to post collateral on positions that a week ago would not have required same.
However we've seen no confirmation of this.
From the Financial Times, September 29:

Free Lunch: Supercycle suspicions
Currency commoditiesThe abrupt end of what some saw as a commodity price “supercycle” has caused wider ructions whose ultimate effects we are only beginning to understand. Commodity-related companies are of course deeply affected, as the seemingly bottomless pit that the miner-trader Glencore’s shares have fallen into illustrates. The International Monetary Fund, meanwhile, devotes a whole chapter in its latest World Economic Outlook to the macroeconomic effects of the commodity price collapse on exporting countries (not good, as you might expect).
Just as interesting is to look at cause rather than effect. The overwhelmingly popular account of how energy and metals prices went over a cliff last year (and have kept tumbling) is a China story: the Chinese slowdown marks the end of the emerging giant’s voracious appetite for commodities to nourish its industrial expansion. For hydrocarbons, the US shale boom is also mentioned — but it is harder to find similar bursts of supply in metals whose prices have also fallen. So the big factor everyone acknowledges is softening Chinese demand. It is the story told by oil guru Daniel Yergin, and it is one that helps Leonid Bershidsky make sense of the freefall in Glencore’s and other commodity traders’ shares.

But there is another, much less well understood factor behind the rise and fall in commodities prices over the past decade. That is the way the sector became financialised and commodities turned into a financially traded asset, on which topic the Financial Times’s very own Izabella Kaminska is the go-to repository of wisdom.

Two facts are important. The first is the commodity industry’s need for large-scale financing of its operations, which makes the sector sensitive to developments in the financial industry, which provides the funding. In an FTAlphaville post a few weeks ago, Ms Kaminska explained how a commodity trader’s balance sheet depends hugely on its ability to secure loans against the security of physical commodity stocks. For a long time, money was loose and banks were more than willing to provide that financing. But things can go wrong with such commodity-secured loans. And the hangover of a financial capital glut in the shale industry could, today, encourage overproduction so as to drive prices even lower, as Tracy Alloway explains....MORE