It almost feels like a pause, perhaps a period of phoney war
in the aluminium world, presumably brought about by summer vacations – however
strongly you feel, the lure of the beach/mountains/boat is always difficult to
resist. As the players return to gird their loins and weigh in to the argument
once again, perhaps it’s time to take stock a little of where we are.
Conspiracy or Coincidence?
The two extreme positions are clear; one is that there is a
dreadful conspiracy between the bankers, the warehousemen and the LME to create
and prolong queues and thus oblige the general public at large to pay more than
they need for things like their cans of beer, the other is that a particular
co-incidence of economic factors has contributed to an environment where high
metal stocks and long queues to withdraw them from warehouse are inevitable. My
personal opinion veers more towards the latter, but in truth there is probably
a general agreement in the middle ground that the situation is not ideal.
That’s what has caused the LME to begin its consultation process with a view to
try and stabilise the position so that the balance between inflows and outflows
of metal becomes more equitable.
So that’s where we are at the moment – consultation
announced, new rules expected.
Supply and Demand Distorted
Now, the purpose of those putative new rules is clear to
see, and is probably welcomed by many who, while they do not subscribe to the
conspiracy theory, nevertheless have an uncomfortable feeling that the normal
supply and demand laws are being bent somewhat. In response, premia have
fallen, a little bit. Otherwise, nothing has changed, which is fair enough,
given that the changes are so far only proposals, and even when the
consultation period is over there will be presumably be a further gap until
anything is actioned.
Price will go down?
What intrigues me, though, is whether the proposed rule
revisions will in fact achieve what is intended. A reduction in warehouse premium
is almost a given, since without the certainty of the queue to keep metal in
warehouse, the incentive that can be paid to get it there will necessarily be
constrained. So the warehouse/banker/trader will pay out less, if indeed
anything, to fill their sheds. That will reflect also in a reduction in the
physical premium producers can charge to their consumer customers. So those
consumers will be relatively happy, as their cost will reduce. Not so good for
the producers, though, because there is no reason to suppose that the
underlying price will rise to accommodate the decrease in premium. No, there
are millions of tonnes of the stuff sitting in warehouse stocks at the moment,
and the world values it at around $1800-odd a tonne. Since the consensus is
that the bulk of the cancelled warrants are held by the financiers themselves,
it’s difficult to see that changing the rules on warehousing is going to alter
the global demand picture one iota. In fact, if anything, there is a good
chance that the price will actually go down, since that metal which is now
semi-detached from the marketplace will be perceived as being fully available.
Yes, it’s hedged into the market at the moment, but while it is still there and
unencumbered, it represents an alternative source of supply to new producer
Warehouses/financiers will be relatively happy (unless the
regulators and/or courts choose to rule that they have done something wrong),
since, until demand picks up, the likelihood is that metal will keep coming
into their sheds and stay there – and they won’t have had to pay a premium to
get it. Sounds good to me.
So it seems to me that the result of the putative changes
will be that consumers will probably get their metal cost down – which is what
they have been campaigning for – warehouses will continue to earn their money,
although it will be more open to market changes than when the stock was locked
down, but the producers will be likely to see a reduction in their achieved
price. Well, there may be a rough justice in that; after all, the real root of
the problem lies with the way they were happy to take the financiers' shilling
in 2008, rather than cut back in the face of economic slowdown. To get the
price to start moving back up again, we would need one of two things – or
preferably both; significant production cuts (which, to be fair, do seem finally to
be beginning) or a change in governmental policies to stop creating money to
magic away the debt problem.
Which do you think is the more likely?