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COLUMN-LMEWeek: One elephant, no bazooka, little commitment:Home

Thu, 10th Oct 2013 15:55

(The author is a Reuters columnist. The opinions expressed are his own.)

By Andy Home

LONDON, Oct 10 (Reuters) - There was only really one topic of conversation at London Metal Exchange (LME) Week this year.

And it was the one that was not on the official agenda.

At the opening event, the LME's Monday morning seminar, the new chief executive Garry Jones echoed the Hong Kong Exchanges (HKEx) message of sunny Chinese uplands.

Outgoing deputy chief executive Diarmuid O'Hegarty chaired a round-table discussion on the impact of new European Union market regulations.

It was only at the closing Q&A session that someone, actually the Financial Times, had the temerity to ask about the elephant in the room.

What precisely does the LME intend to do with its malfunctioning warehousing system?


Away from the official podium, it was the question that was asked at every cocktail party, every lunch and every coffee meet.

Consumers are still profoundly unhappy with the LME's latest proposal to cap load-out queues at 100 days. "A first but insufficient step for solving the systemic flaws of the LME warehousing system," according to European steel lobby group Eurofer, the latest heavyweight to weigh into the debate.

The big aluminium producers were in town to argue just the opposite. "We think there is no need to change," said Oleg Mukhamedshin, deputy chief executive of Russian giant United Company RUSAL.

Everyone else is still trying to figure out what are the implications for the aluminium market, particularly physical premiums.

Consensus thinking right now is they will go lower but not back to anything that might be deemed a historical norm.

But it will all depend on what exactly the LME does next.


And on that key question there was no official answer.

The LME, according to HKEx chief executive Charles Li, not carrying a bazooka this week, has had an extensive consultation with industry and heard, not entirely surprisingly, a wide array of views.

A decision may come at a board meeting later this month.

Or maybe not.

"We'll make a decision. It could be in October, could be in November, could be any time after the board meeting," according to Jones.

Feeling enlightened? No? Nor is anyone else.

Li did at least concede that the LME might look to enhance transparency, maybe something along the lines of a U.S.-style Commitment of Traders Report, as suggested by both consumers and producers.

It's not exactly controversial stuff. After all, no exchange is going to argue that more transparency isn't in principle a good thing.

But, according to Li, "we need to figure out how to do it".

Good things, as they say, come to those that wait. Just ask your average U.S. aluminium consumer.


CME Group, by contrast, did want to talk about warehousing, or at least up to a point.

The U.S. exchange stole the LME's limelight by announcing it was at an advanced stage towards launching its own aluminium contract.

A physically-delivered one with "transparency that only CME can offer," according to Harriet Hunnable, director of metals at the exchange.

Not that she would be drawn on exactly how it would work, or critically, where the physical liquidity would come from.

It's not as if CME hasn't tried before. A previous attempt to challenge the LME's aluminium pricing dominance fizzled out due to an overwhelming lack of interest.

There is no doubt that there is more interest in an alternative to the LME contract this time around.

But whether any new CME offering can gain real traction will depend on the devilish delivery detail.

Good things, as they say...


Leaving aside the elephant and the missing bazooka, there was a generally upbeat narrative running through this year's LME Week.

Gerard Lyons, economist and keynote speaker at the LME seminar, set the tone with a positive assessment of the global economy, "divided, disconnected but still growing".

Most other analysts agreed.

China's metals demand is now deemed to have been stronger this year than previously thought, although this was less a revelation than a culmination of accumulating evidence from markets as diverse as iron ore and copper.

Other BRICS have disappointed and the "I" in that grouping seems to be in the process of morphing from India to Indonesia.

But the underlying story of new world urbanisation and industrialisation continues to run.

There is even hope for the old world, led by the U.S., assuming a rational outcome from the irrational politicking of Washington ahead of the debt ceiling deadline.

If the LME "Street" wasn't exactly swinging from the rafters, it's because of the recent lack of directional commitment across most of the LME base metals suite.

Weeks of sideways grind have sidelined just about everyone apart from the black-box traders who can trade the noise in otherwise range-bound markets.


Hope comes in the form of divergent supply-side drivers. Demand is doing well enough but, most agree, it is the state of supply that will differentiate winners from losers in the LME pack.

On that basis aluminium and nickel (CMNI3> are the losers and will remain so until supply is sufficiently curtailed to make a dent on large and growing inventories of both.

That said, both look pretty well supported at the lows at the moment. Shorting either, it is generally felt, is a tricky proposition given the amount of existing short positioning, both by stocks financiers and by technical traders, with the attendant risk of occasional sharp upside spikes.

Copper is on the road from deficit to surplus but with sufficient uncertainty about timing and degree to keep most in wait-and-see mode.

Tin is the obvious winner, given the current choke-hold on supply from Indonesia, the world's largest exporter. Exports last month fell below 1,000 tonnes for the first time since 2007.

Going long now, though, is the equivalent to squeezing into an already crowded room with the attendant risk of being crushed in any stampede for the exit.

Which leaves lead and zinc (CMZN3> as the picks of LME Week.

Lead is supported by a strengthening bull narrative, underscored by the forecast from the International Lead and Zinc Study Group (ILZSG) that the market is heading for its first year of deficit in five years.

Throw in the impact of the closure of the last primary smelter in the U.S. on physical flows and premiums and the bull cocktail gets even spicier.

There is also a distinct buzz about the zinc market at the moment, although without any obviously supportive fundamental backdrop. Indeed, ILZSG expects another year of surplus in 2014 and another one after that.

Yet it is definitely on the "Street's" radar, judging by the chatter over the last few days. Listen to some of the whispers in the shadows, though, and things may not be quite as straightforward as they appear.

Beware false signals, not least LME zinc stocks, which are increasingly concentrated in locations such as New Orleans, Antwerp and Detroit.

Yup, it's that elephant again. And no bazooka in sight!

(Editing by William Hardy)

(c) Copyright Thomson Reuters 2013. Click For Restrictions - http://about.reuters.com/fulllegal.asp

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