A few themes seem to have swum into focus during 2014; let’s first consider the idea that there is a developing gap between the perception and reality of the markets. It’s presented itself in a few different guises, but the underlying suggestion drip-fed into the public consciousness has been that financial markets are not true and fair representations of the trade flows underlying them. Put another way, perhaps the markets are casinos for the insiders to play rather than the essential engine room of the capitalist economic system. It’s an important point; equity markets exist to enable entrepreneurs to raise capital, bond markets do the same for governments (and corporates), commodity markets are there to help traders hedge their exposures to the vagaries of the ebbs and flows of resources. Without those facilities, the movement of capital and goods - essential for our economic well-being - would become infinitely more difficult. So are the markets currently adequately fulfilling their role or not? Where is the reality?
Price Discovery and Transparency
Looking back at the articles on this site over the past twelve months, it is noticeable that two of the frequently occurring topics have been the integrity - or otherwise - of price discovery and the concomitant transparency of markets. These address precisely that issue. The (to me slightly strange) view that electronics must be better than human involvement has seen the seen the shift in the precious metal fixes from the traditional to the electronic auction (spawning what must be a contender for quote of the year, the remark by a journalist that the fix would be like it was, but “with an algorithm instead of a chairman”, suggesting that an algorithm is so far superior to a human chairman….). I’m still confident that we will see a scandal emerge out of algorithms being used to game that algorithmic chairman, by the way.
Anyway, for better or worse, 2014 saw precious metal price discovery moving from the traditional to the modern. The other manifestation of the same search for transparency - the LME warehousing system - dragged on through the year, and as yet has still really not reached a satisfactory conclusion. Rusal had their moment in the sun, while the High Court upheld their claim against the LME, only to see that judgement overturned some months later by the Court of Appeal. There has been a hardening understanding in the market that the LME no longer represents the aluminium price in the way we have traditionally understood it to do. Right now, the LME is not an adequate hedging mechanism for aluminium, which must be a matter of considerable concern. However, that doesn’t automatically lead to the conclusion that playing around with bits of the LME rules is necessarily going to resolve the issue; there are extraneous (to the LME) considerations which will preclude a solution until they are also addressed. Prime amongst those considerations is still the ultra-low level of interest rates, which makes metal storage an interesting (close to) risk-free return for investors. The emergence of the Reuben Brothers (well-known in metals circles from the heady days of Transworld Metals) as buyers of Metro from Goldman Sachs simply moves the business to an entity less in the public eye. Not much else will change while circumstances remain the same.
Away from the specifics of the LME, something of general significance which has caught the eye has been the deliberate(?) trashing of the crude oil price. I put that question mark there, because although it seems to me to be a very deliberate policy, I know there are those who doubt that thesis. To me, it frankly seems an obvious reaction to the growing influence of US shale oil - with the interesting side issue as well of causing difficulties for Russia - by the low-cost Arabian producers to re-assert their stranglehold on western energy supply. Will it succeed? Well, the damage to Russia may well do (although one of my fellow-writers on this site will be looking at that in more detail in next couple of weeks) but my belief is that stemming shale production is unlikely to happen - technological advance will see to that.
Back to the metals, and the Qingdao incident took centre stage in the middle of the year. It’s a serious issue, and the law suits have still got a long way to run. The long-term effects are likely to have a permanent influence on the way metal is financed in - well, let’s call them less than blue-chip storage facilities. But it’s another version of the same theme - the gap between perception and reality; financiers thought they owned metal stored at the port. In fact, they didn’t. Or if they did, they weren’t the only ones with claims on the same parcels of stock. Banks blasé with their stock control systems and their self-perceived deep knowledge of their business may start to understand better the difference between an LME warrant and another piece of paper drawn on a less regulated entity.
A Victory for Reality...
One last thought on the year, and one to give myself flowers. What happened to all those calling for nickel prices to rocket through the 20000s on the back of the Indonesian ore ban? Well, I urged them to be cautious; my prediction was that the price would end the year below $18000, and indeed my vote in Metal Bulletin’s poll was for a year-end sub $16000. Looks good to me, and this one is a victory for reality over perception; the reality being that with significantly slowing growth in China, no immediate squeeze on nickel supply (evidenced by bloating LME stocks) and sufficient low-grade ore held in Chinese ports, there was never really any serious likelihood of any more than a quick spike in prices, caused by the perception of an Indonesian-created shortage.
Over the next few weeks, we’ll be looking at what may be the significant themes to follow in 2015….which is obviously far more difficult than looking back……..
I would like to take the opportunity to thank readers for following this site during the year and I hope to continue to attract their attention. I should also thank my fellow-writers; I genuinely appreciate their help. Finally, I must also thank the advertisers for their vital and most welcome support. A Happy New Year to you all.