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25 July 2019

Oversight of Metal Stocks - to be extended?



Over the course of my career, I learned that often the best trading opportunities occur around that fuzzy, uncertain line where the LME forward (futures) market and the physical metal market meet. I know it would be easier for the regulatory authorities if that line were a clear, unambiguous frontier, but it’s simply not so. That’s a large part of the reason why warehousing - which is right in that fuzzy zone - has consistently been a subject that causes difficulties in the market. Difficulties? - well, depending on one’s point of view: for some, a clear indication that more regulation is needed, for others, another trading opportunity. 

Actually, the joint efforts of the regulatory authorities and the LME administration have worked largely quite well, and have seen off the more egregious behaviour which has threatened market stability - excessive queues, for example. Because, although I refer above to trading opportunities, we have to remember that these things do not happen in a vacuum, and that the LME is not, although it may sometimes feel like it, existing without reference to the rest of the world. 

The provision of metals - which includes the pricing of them - is one of the most basic underpinnings of our industrial society. It’s not just a game to be played to make profits for a select group.

But last time I looked, the LME was a market place; somewhere its members can come to transact their business, always within the regulations that have been established. Those, obviously, will evolve over time: nothing stands still. 

There has been a suggestion, though, (and I must confess I’m not completely sure how serious it is at this stage) that the LME should begin to monitor and publicise levels of metal stocks which are currently not on warrant, but which might, at some time in the future, be warranted. That’s a pretty open-ended requirement, and frankly I have no idea how one could enforce it - short of all LME-deliverable material being declared, just in case. That would effectively make the LME almost an international agency charged with reporting to - whom? - Governments? - how much metal there was in the world at any given time. To me, that seems a step too far away from its avowedly commercial purpose as its members marketplace. If the world really needs to know this, then set up an institute - presumably under the UN - to record it. Using the LME would risk not being effective, frankly. Of course, any bank or other financier would play along, because they need to have to possibility to deliver financed material onto the LME, if necessary. But beyond that? Would miners have to declare copper cathode they produced for sale directly to consumers, just in case the consumer had a strike, for example, and chose the path of delivering excess metal to the LME?  

Well, I don’t know how far these discussions may have gone, but it looks a rocky path to me. 

And be careful what you wish for. I have seen analysts comment that this would be beneficial, ‘bringing more transparency to the market’. Mmm, yes, but, dear analysts, if we have absolute transparency, do we need your output? If everybody knows everything, do we need analysis - what more will it tell us?

We’ll see what happens, in the fullness of time, but I remain to be convinced by this one. 



It's midsummer, and I'm off sailing. There will be no articles on this site for the next two weeks, as harbour and marina wifi networks are, in general terms, pretty useless. I hope readers all have an enjoyable summer.

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