Summer Pause in Aluminium Squabbles
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 metal.
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?