(Repeats Tuesday’s story with no changes to the text. The opinions expressed here are those of the author, a columnist for Reuters.)
* LME Lead Price, Stocks and Spreads: tmsnrt.rs/3c6uNWe
By Andy Home
LONDON, Feb 25 (Reuters) - The London lead market is experiencing its most severe and prolonged period of tightness in almost a decade.
Stocks of lead registered with the London Metal Exchange (LME) are flat-lining near historic lows and nearby spreads are both volatile and elevated.
None of which is obvious from the outright lead price, which like the rest of the LME base metals complex has been laid low by concern about the spread of the deadly conoravirus.
At a current $1,850 per tonne, LME three-month lead is down by 4% on the start of January, albeit faring better than bellwether copper, which is down by 8%.
That suggests that the tightness in London is primarily technical, reflecting the influence of two dominant long players against a backdrop of constrained stocks liquidity.
What’s curious, though, is the absence of any significant metal deliveries into the squeeze - although this might be as much to do with the LME’s physical storage function as it is with the underlying lead market.
The benchmark LME cash-to-three-months lead spread CMPB0-3 traded out to a backwardation of $67.50 per tonne last week. The cash premium was still valued at an elevated $54.50 as of Monday’s close.
You’d have to go all the way back to 2011 to find such extreme levels of tightness across the front part of the LME forward curve.
The pressure is concentrated on the cash date, with the tom-next spread also trading in persistent backwardation over the last week.
What is in essence the cost of rolling a short position overnight has traded out to $9 per tonne every day since last Tuesday.
This seems to be down to a collision of dominant long positions operating with highly limited stocks availability.
Two entities between them hold at least 90% of available exchange stocks, according to the LME’s latest market positioning report <0#LME-WHL>.
Throw in cash date positions and one entity accounts for 50-80% and the second one 80-90% of available stocks. <0#LME-WHC>
It’s worth considering that both entities are subject to caps on how much they can charge short positions to roll, which means that although acute, the current level of tightness is being actively constrained by the LME’s rule-book.
Those dominant positions are measured against available LME stocks, which currently total 65,325 tonnes.
Total stocks, including metal awaiting physical load-out, stand at just 67,575 tonnes, equivalent to two days’ worth of global consumption.
LME inventory has been holding at these depleted levels for the best part of a year, with a lack of activity the stand-out feature.
Exchange warehouses have seen just 2,200 tonnes of arrivals and 825 tonnes of departures since the start of January. There has been zero headline action on 22 of the 38 reporting days so far this year.
This is anomalous since such severe spread tightness would normally be expected to drag metal into the LME system.
However, the main impact to date seems to have been a lot of movement of metal from the cancelled category back to the live warrant category, rather than any fresh deliveries.
The question is whether the apparent lack of available lead is a reflection of underlying market conditions, or of the LME’s own storage dynamics.
There is no doubt that global stocks of lead, including metal sitting in the statistical off-market shadows, are historically low.
The International Lead and Zinc Study Group (ILZSG) has just released its first take on lead’s supply-demand dynamics last year, assessing a marginal supply surplus of 8,000 tonnes.
This follows three years of deficit markets, which would have meant a drawdown of stocks to meet demand.
The shift to surplus is still playing out, and the group’s first take on last year’s balance falls short of an October 2019 forecast of a 55,000-tonne surplus.
That suggests there remains residual tightness in the physical lead supply chain.
Certainly, there has been no significant rebuild in visible Chinese stocks either. Registered tonnage with the Shanghai Futures Exchange currently stands at 38,766 tonnes, down by 5,796 tonnes since the start of January.
However, it stretches credulity that the combined exchange inventory of 106,000 tonnes represents the entire pool of global supply-chain lead stocks.
Rather, it seems that lead is the latest example of metal being held in the LME shadow warehousing system, located in a registered storage depot but not actually entering the warrant trading system.
The owner is likely benefitting from a sweetened rent deal with the warehouse operator without running any risk of losing control of the metal by releasing it into the LME market-place.
Quite evidently, if there are more stocks “out there”, even the hefty cash premium trading on the LME hasn’t been sufficient to incentivise owners to deliver metal onto the exchange.
That suggests that this squeeze may not only continue but might need to get even more severe to cause a rebuild in exchange stocks.
If they rebuild at all.
There is a concern that the shadow storage market has evolved so far that exchange storage will never be the same again.
The LME itself has proposed another series of tweaks to its warehouse operating model to try to encourage more metal into its system.
It is also proposing to start reporting shadow stocks later this year to try to restore a modicum of transparency to an increasingly opaque part of the market.
Several LME contracts, most prominently aluminium, have been experiencing a growing disconnect between visible stocks and price, leaving spreads the often messy arena for a reconciliation of paper and physical markets.
It now appears to be happening in the London lead market as well.
Editing by Jan Harvey