Archive through August 06, 2004
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     vermante
Member
Username: vermante
Post Number: 158
Registered: 11-2002Rating: N/A
Votes: 0
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| | Sunday, June 27, 2004 - 08:11 pm: | 
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Rederob,
What percentage of global base metal transactions pass through LME ?
I presume the major base metal producers and users would have individual contracts .
If that is the case ? Whats is the relevance of the LME warehouse stock levels. ?
Does the LME base metals warehouse levels truly reflect the demand/supply equation for global base metal usage ?
What are the possible weaknesses in using LME data
Cheers
Vermante
Cheers
Vermante
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rederob
Member
Username: rederob
Post Number: 159
Registered: 10-2002Rating: N/A
Votes: 0
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| | Sunday, June 27, 2004 - 09:31 pm: |
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vermante
They are excellent questions and I do not know precise answers.
But some info:
Currently there are over 400 LME warehouses in some 32 locations covering the USA, Europe, the Middle and the Far East.
COMEX and Shanghai exchanges also have warehouses, but not comparable to LME's.
Presently LME accounts for around 30% of total base metal stocks.
While it was true that manufacturers held large stocks on inventory, modern technology and transport systems mean that there is little need to keep much stock on hand. So exchange warehouses are more relevant today than ever.
I do not know the extent that manufacturers have direct contracts with metals producers, or where that data may be.
I would imagine that only the largest manufacturers could negotiate such contracts in any event and would be grateful if any readers could help out here.
Metals producers need to be exposed to rising markets (when they occur), so if they lock into direct delivery contracts (which would generally be long term) they can lose out big time.
LME provides merchants with the flexibility they need to sell to spot or hedge their commodities so as to better manage their business.
LME stock levels are relevant in they they reflect the base metals market better than any other indicator - transparent, reliable and the historical data correlates highly with commodity booms and busts.
Possible weaknesses in using LME data? Same as in using any data if you understand how the data is derived in the first instance.
The biggest danger, however, is not knowing how "substitution" may impact the markets when prices rise too high (recall what happened to palladium for an example).
Substitution is a major issue for nickel, where lesser grades of steel can be used for similar products.
However, copper has few present competitors as its price would probably have to increase many times before manufacturers began shopping for something that could achieve the same outcome.
As a footnote, you need to ask yourself if the largest market player is showing a particular trend, how likely is it that its competitors/peers could be experiencing something different.
In this case LME's economies of scale give it a market edge, so it may just be that its warehouses run out first - I don't know, but we all might find some answers before Christmas.
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vermante
Member
Username: vermante
Post Number: 159
Registered: 11-2002Rating: N/A
Votes: 0
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| | Monday, June 28, 2004 - 09:18 am: |
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Rederob,
Thanks for the response, much appreciated . Similar to you, I read extensively , and follow the LME markets.The overall market consensus using persuasive arguments based on LME supply /demand data is that we are heading for a commodities boom.In fact "they" are barking it from the tree tops . It appears so damn obvious that I am vary of walking into a "succour punch"
Below is an extract from a leading financial daily news letter re oil
"A pullback in crude oil prices, which slumped on an unexpectedly big rise in U.S. crude oil inventories, helped soothe some of Wall Street's jitters".
The quote " on an unexpectedly big rise in inventories" which applies to oil stocks could be similarly applicable to LME warehouse levels and hence creates uncertainty in the mind of the investor/trader
As you are aware a rise in inventories either due to increase in production or a decrease in demand generally leads to declining prices .
If you refer to LME warehouse levels re Zinc you would note a dramatic increase in stock levels in the last fornight.I have yet to track down a reason , but will do so when time permits.
My conclusion re the use of LME data is that whilst useful re-determining the short term direction of particular markets, should be treated with caution as to long term forecasts
Cheers
Vermante}}
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johnboy
Member
Username: johnboy
Post Number: 27
Registered: 11-2002Rating: N/A
Votes: 0
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| | Monday, June 28, 2004 - 02:10 pm: |
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Guys,
From what I know, the smelters lock into a contract with the producers for tonnes and charges, but not metals prices. The Treatment Charge and Refining Charge are set at cost per tonne. Then there's a Price Participation rate that varies with the metal prices (but this isn't huge amounts). The price paid for the contained metal is based on the spot rate. I don't know how many smelters have contracts but knowing the total size of the supply contracts would be interesting data.
Like Rederob said, manufacturers and suppliers can then use the LME or whichever exchange to hedge their risks.
Hope that helps a bit.
John.
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rederob
Member
Username: rederob
Post Number: 161
Registered: 10-2002Rating: N/A
Votes: 0
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| | Monday, June 28, 2004 - 05:51 pm: |
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Thanks for that John
vermante
Oils ain't oils!
Inventory levels for US oil do not match the supply demand scenario for base metals:
As you can see, there is little change to stock levels year on year (slight actual increase in 2004).
However, prices are up - well over 25%
Crowson of LME wrote about our issue in March this year:
http://www.lme.co.uk/downloads/lmestocks_marketbalances.pdf
What he makes clear is that warehouses now account for a greater proportion of available total supply than ever before AND that it is important to note that past supply levels should not be seen as adequate in today's terms.
The implication is that lower stock levels today (copper and nickel in particular) have greater potential than ever to drive prices higher as the net impact of no supply multiplies manifold.
What I consider most important in the supply imbalance equation is that there is virtually no net restocking occurring for the base metals (apart from zinc and tin of late) on a daily, weekly or monthly basis.
Let's for argument's sake assume net restocking was occurring now. Do market fundamentals suggest a slowdown in China or the US, or Japan? Not a lot, if any at all, is my answer today.
Therefore, unless restocking rates were significant (greater than 5% per week), the spectre of destocking and higher prices would remain.
My point is that the present trend is likely to continue for some time, and certainly well after clear restocking signals are given.
As an example, if copper stocks increased 100%, that level is only 20% of its level 12months ago.
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rederob
Member
Username: rederob
Post Number: 163
Registered: 10-2002Rating: N/A
Votes: 0
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| | Wednesday, June 30, 2004 - 02:46 pm: |
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Nickel is on another upleg, so the 5 year cash chart is illuminating:
Contrast this with supply over the same period, which I have inverted so that the inverse relationship becomes clear:
After tonight's Fed rates decision, which should finally see a rate rise, a rebalancing of markets should take place over coming weeks.
With US consumer confidence at a 2year high, its market for metals will remain buoyant in the near term.
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rederob
Member
Username: rederob
Post Number: 165
Registered: 10-2002Rating: N/A
Votes: 0
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| | Wednesday, June 30, 2004 - 10:54 pm: |
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While copper got a brief restocking on LME yesterday, the theme of drawdowns continues tonight:
London Metal Exchange Warehouse Stocks
Metal Tonnes in Storage & Change from
yesterday
Aluminum 942,925 -4150
Copper 104,575 -800
Nickel 8,430 -30
Lead 45,475 -350
Zinc 731,125 -900
New York Futures Market Warehouse Stocks
Metal Tons in Storage & Change from
yesterday
Aluminum 121,699 -7672
Copper 96,044 -1565
Against common sense, warehouse data and anecdote we hear that total stocks of aluminium at western world smelters (excluding finished end-products) rose to 3.092 million tonnes at the end of May 2004 from 2.916 million in April and 3.026 million in May 2003. These data cited by Reuters from provisional International Aluminium Institute figures.
Analysts are at a loss to explain the aluminium position - maybe someone entered some dodgy data!
On the copper front we have an early rise today, as workers prepared to begin a strike on Friday at the Collahuasi mine in Chile.
With copper supplies tightening it won't take much to spook the market one way or the other.
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rederob
Member
Username: rederob
Post Number: 166
Registered: 10-2002Rating: N/A
Votes: 0
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| | Thursday, July 01, 2004 - 07:40 pm: |
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Dear hilarius
Readers are in dire need of another original artwork (me, at least!)
Yesterday was fantastic for commodities - nickel and lead jumping around 5% each.
Tonight sees the copper squeeze closing in on LME inventory's magical 100,000 tonne figure with a 3% drawdown.
US copper usage data showed that 2003 was down on 2002:
http://www.copper.org/resources/market_data/pdfs/2004_Annual_Data.pdf
Interesting to see where copper goes in the US, so here's the facts:
Building construction (3,382 million pounds) continued to be the largest end-use market for copper products, accounting for nearly half, 48.4%, of total U.S. usage. Electrical and electronic products (1,450 million pounds) accounted for 20.7% of total usage; consumer and general products (759 million pounds), 10.9%; transportation equipment (724 million pounds), 10.4%; and industrial machinery and equipment (675 million pounds), 9.6%.
Given a pick-up in US activity this calendar year, it's not hard to see why exchange inventory continues to decline.
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rederob
Member
Username: rederob
Post Number: 174
Registered: 10-2002Rating: N/A
Votes: 0
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| | Tuesday, July 06, 2004 - 08:20 pm: |
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Tonight we cop a double whammy of drawdowns at LME: breaching the milestone of 100,000mt of copper and 8,000mt nickel.
London Metal Exchange Warehouse Stocks
Metal Tonnes in Storage Change from
yesterday
Aluminum 932,925 -1425
Copper 99,625 -375
Nickel 7,830 -282
Lead 43,800 -275
Zinc 725,825 -2250
While volumes have been thin, the uptrend since May has continued and it is difficult to see any significant turnaround near term.
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hilarius
Member
Username: hilarius
Post Number: 241
Registered: 04-2004Rating: N/A
Votes: 0
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| | Tuesday, July 06, 2004 - 09:11 pm: |
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Hi Rederob
Thinking of more artworks as per your Thursday request
Below is one ... with a question
What does it mean when there are fluctuations in the cash price compared with the 15 month price?
If both are rising and the cash price gets relatively stronger is that bullish?
What does it mean when the ratio of the cash price to the 15 month price weakens, even as both prices are rising?
Are there implications for the share prices of producers?
With Best Wishes
Hilarius
I come in peace to share my thoughts and to shine my candle light on possible long term opportunities
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rederob
Member
Username: rederob
Post Number: 176
Registered: 10-2002Rating: N/A
Votes: 0
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| | Tuesday, July 06, 2004 - 11:18 pm: |
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hilarius
Lost in space my previous attempts to post.
Simply put:
Oversupplied commodity has low spot price compared to futures (contango).
Converse for near outages of stock (backwardation).
"neutral" supply/demand generally has a slightly higher futures price to reflect cost of warehousing.
Read the basic explanation at:
http://www.fenews.com/fen35/back_to_basics/back_to_basics.htm
The cash-threes or cash to 3 month futures price is most commonly used, rather than 15 months futures.
When the rate of backwardation starts to increase for a commodity it usually implies trading is thinning and volatility is high: Good for equities, tough for futures speculators.
Watch the equilibrium on Alumium change as its stocks drawdown further. Currently in contango, aluminium is closing in on a zero cash-threes. When it goes into backwardation traders get a signal that its bullishness has moved into overdrive.
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rederob
Member
Username: rederob
Post Number: 179
Registered: 10-2002Rating: 
Votes: 1
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| | Thursday, July 08, 2004 - 10:18 am: |
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hilarius
This snippet reflects what may be in store for BHP:
July 7 (Bloomberg) --
"Alcoa Inc., the world's biggest aluminum maker, said second-quarter profit almost doubled as prices surged and high-margin sales to airplane and automobile makers grew.
Net income rose to $404 million, or 46 cents per share, from $216 million, or 26 cents, a year earlier, Pittsburgh-based Alcoa said in a statement. Sales rose 11 percent to $6.1 billion, its highest in three years.
Alcoa benefited from a 25 percent rise in the average selling price of its aluminum in the quarter and a 4.5 percent boost in shipments spurred by demand from China and an improving U.S. economy."
Overnight the base metals complex rose across the board - copper, nickel and lead each by around 2%, with zinc the laggard picking up only 0.5%.
Commodities have now topped for the 5th time in under 6 months (via above GFMS index above).
Coming of a higher base, and continiung at a lesser rate of ascent than the previous highs, this current rally holds every chance of turning 146 resistance into support.
The complex sits some 50% higher on average in 2004 than last year - so the pundits that forecast BHP to have its biggest year in history have every reason to be confident.
Not only will BHP pick up via metals, its exposure to higher oil prices will see it with a clean sweep in every area of its business.
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rederob
Member
Username: rederob
Post Number: 198
Registered: 10-2002Rating: N/A
Votes: 0
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| | Friday, July 16, 2004 - 08:25 am: |
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