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09 January 2013

Warehouses – the rugby football moment

It’s not often that I disagree with another Metal Bulletin article.

In this case, however, I’m afraid I think my colleague Andrea Hotter is a little off-target with her piece ‘Warehouse wars – put up or shut up’.

It may well be true that few or no consumers have complained directly to the LME about the effect of warehouse queues on their businesses, but surely, if traders have kicked up a fuss, it is most likely to be as a proxy for the consumers to whom they would like to be delivering metal?

Surely, the only reasons traders would want to move metal out of warehouses would be either to deliver to consumers or to put in another storage facility? But anyway, in general, I don’t think we would expect consumers directly to have metal in the queues.

Major aluminium consumers, for example in the packaging or automotive industries, are hardly likely to base their metal procurement policies on taking metal from LME warehouses. They buy, in the main, directly from producers. Small consumers do, to an extent, rely on LME supply, but broadly through the intermediary of a trader.

Anyway, we all know that in the current global economic circumstances, metal is available relatively easily from producer sources. Indeed, Alcoa itself told us so, not that long ago. The problems caused by the warehouse queues do not directly concern constraint of supply.

Rather, what the trade has to contend with is a level of premium artificially elevated by blockages in warehouses. Metal is available, but the structure of the price has been changed. That is where the problem for the metal-consuming industry lies.

Complaining that rules are being broken is irrelevant.

I don’t think anybody seriously suggests that the warehouse companies are doing something wrong. Maybe there is the odd suspicion of slightly permeable Chinese walls, but I doubt it is anything more serious than that.

No, we are effectively at that point at Rugby School in 1823 when William Webb Ellis picked up the ball and ran with it. The rules of football suddenly became irrelevant in the new game he had begun to invent; applying those rules was no good. What were needed were rules to handle the new game.

And that is what is happening here. The game used to be a comfortable, metal-related storage one, part of the overall ebb and flow of refined metal around the world to facilitate the operations of producers, consumers and traders.

But the actions of governments since the catastrophic loss of financial confidence that followed 2007/08 have changed the whole game.

Now it is all about money recycling. Governments globally are so fixated with the idea of destroying the value of their currencies as a way of (artificially) reducing the value of the unsustainable debt they allowed to accumulate over the preceding decade or so that they will parcel out seemingly endless free money to the banks in their domestic economies.

Those banks have shown themselves to be all sorts of things in recent years, but they are not stupid. Faced with the choice of passing that money on to enterprises that may or may not use it wisely, or simply exchanging it for a hard commodity whose value in currency is likely to hold better than the true value of the money itself, they are choosing the latter course.

In allowing that money to flow into sheds in the form of metal, the warehouses ¬ many now owned by the banks themselves ¬ are not breaking any rules. If people want to cancel warrants to lengthen the queues and, therefore, secure the deal even more, that is also within the rules.

If some don’t like it, well, lots of people didn’t like the new rugby football, either.

So that’s where we are now: faced with a new game. The unfortunate thing is that, unlike rugby football, it may not be a long-lasting game.

It’s OK(ish) at the moment, but actually there is one potentially fatal drawback. It depends on an endless supply of cheap money, which is probably impossible to maintain, even for the most self-serving of politicians. Without that, it looks a bit like musical chairs, and one day the music will stop.

So don’t complain to the LME that warehouses are breaking the rules; they are not, to any significant extent. Complain to the politicians that they are deliberately destroying the value of your wealth. It’s not a metal industry problem, it concerns everyone.

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