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Column: London Metal Exchange must contain messy copper

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View of the ENAMI (National Mining Company) copper cathode plant in the town of Tierra Amarilla, near the town of Copiapo, north of Santiago, Chile, on December 15, 2015. REUTERS / Ivan Alvarado / File Photo

LONDON, October 21 (Reuters) – It was the week Doctor Copper got messy.

The London Metal Exchange (LME) was forced to enforce the restrictions as fierce pressure rocked the market as the premium for the cash metal spiraled out of control to an all-time high of $ 1,103.50 per tonne at one point on Monday as the exchange’s monthly close date fell into chaos.

The London copper contract was sucked into a stock void after the amount of metal available in the LME’s global warehouse system fell to just 14,150 tonnes last Friday, the lowest since 1974. The remainder of the 181 400 tonnes had been canceled for loading. outside, which means it was not on the table in terms of monthly reconciliation of physical positions.

Who caught all the copper?

Trafigura for one. The trade center said it had indeed recovered stocks from the LME, but said others were also involved in the series of stock cancellations that depleted available tonnage by more than 168,000 tonnes by mid -September.

The tightening inevitably brought up bad memories for the copper market, particularly the Sumitomo scandal of the 1990s, a prolonged period of manipulation centered on rogue trader Yasuo Hamanaka.

The comparison is understandable, but the current market dynamics are not that of the last decade of the twentieth century.

LME shares, cash prices and spreads-3

PROBLEM WITH TOM

What has not changed in the meantime and today is the tolerance of the LME for large dominant positions, both paper and physical in the form of registered securities.

This is historically anchored in the DNA of the 144-year-old market, as it has always been where the world’s largest industrial metals players have operated.

However, the light regulation of the LME is in line with the UK financial model.

The current LME regulations, allowing dominant positions but with restrictions on how they are traded, were drafted by Alan Whiting, executive director of the UK Treasury’s Regulatory and Compliance Department before being parachuted into the LME in 1997 to settle The Sumitomo Disorder.

The downside to this approach is that the LME only kicks in when the market is about to collapse, or in regulatory terms, gets messy.

The chaos meter, so to speak, has always been and remains the curiosity of the LME which is the “tom-next”, which is the cost of rolling a short cash position overnight. It became a supernova on Friday, trading at $ 175 per tonne of offset and hit the triple again on Monday and Tuesday.

At this point, the LME has announced that it will cap the spread at 0.5% of the cash price of the day before – around $ 50 per tonne – – or at 0.25% in the case of large positions representing more than 80%. available stocks.

Given that stocks on hand, currently negligible, are the criteria for determining dominant long cash positions, it is no surprise that at Monday’s close there were five, two of which were long at over 90. % of LME shares available.

SPECIAL MEASURES

The LME, which said it had “watched the continued tension in the copper market with falling stocks on the Exchange and tightening portfolios nearby,” evidently decided the chaos would only continue as the shorts tried to break down. get out of danger.

Or rather, its Special Committee did.

This uninspired body was created to avoid the potential for conflicts of interest that plagued the entire LME board when deciding on market interventions in the pre-Sumitomo era.

Chaired by Phillip Crowson, longtime former director of the LME, the “specials” include LME President Gay Huey Evans, who also sits on the UK Treasury Board, LME board member Clear Marco Strimer, Arbitration lawyer Barbara Dohmann QC and LME independent director Dr Herta von Stiegel.

Gavin Prentice, currently chair of the LME users committee, joined the special committee last month, presumably to improve practitioner knowledge.

While this represents a lot of regulatory and legal firepower, it still operates within the LME and London laissez-faire market philosophy.

PROBLEM WITH COPPER

It is clear from statements by LME and Trafigura that the two have entered into a regulatory dialogue on the copper trader’s positions and his stock drawdown.

Trafigura appears to be convinced LME compliance officials that he has a legitimate reason to buy so much copper in what is supposed to be the market of last resort.

Cynics will scoff at the claim cited by the company that the metal is needed to meet customer needs in China and Asia, but global copper inventories were only 312,200 tonnes at the end of September, with inventories of Shanghai at a multi-year low of 43,500 tonnes.

Compare and contrast with the copper market of the early 1990s, when the LME warehouse system – much more geographically concentrated than it is today – held over 600,000 tonnes at one point. Indeed, the skyrocketing costs of supporting the price of copper in a surplus market were ultimately what impacted Sumitomo’s Hamanaka.

If that kind of surplus is available today, why did it not show up?

The offset is supposed to attract the metal, but this week’s deliveries to LME warehouses have so far amounted to 9,775 tonnes despite the biggest push in market history.

The unfortunate possibility is that the world is running out of freely available copper. Or, if there is metal there, it’s blocked by record freight rates, another COVID-19 variant of past copper crises.

DYSFUNCTIONAL SUPPLY CHAINS

It may sound shocking, but the tin market is already here, recording its own outrageous $ 6,500 per tonne three-month cash decline in February due to a depleted supply chain.

European zinc smelter cuts are sending tightening ripples from the physical market to the LME market, where the three-month metal last week hit an all-time high and spreads are also downgraded.

The LME leader shouldn’t be backing down, but he is. There is a lot, a lot of lead in Shanghai, but the very high container rates keep it trapped in China.

Industrial metal supply chains are currently dysfunctional in ways not seen in the past, as they are the result of an unprecedented pandemic.

The world is a very different place than it was just a few years ago, let alone the ’90s.

Is the current LME copper shortage a shortage of manufactures or another sign of a broader supply chain crisis?

We will find out very soon as every tonne of copper available is expected to go to an LME warehouse to take advantage of the record delivery incentive.

For now, tom-next has stopped flashing red, sliding back into a more orderly contango on Thursday morning, suggesting the turmoil has abated.

But if the stock markets do not recover, the special LME committee will have its work cut out for it.

The views expressed here are those of the author, columnist for Reuters.

Editing by Kirsten Donovan

Our Standards: Thomson Reuters Trust Principles.


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