Beginning of the end to Metals Warehousing Trades

London, 5 August 2013

The long-awaited demise of inventory financing deals in a number of LME-traded metals appears to have arrived. While this story has a way to run, the recent rise in global interest rates that followed the US Fed’s attempts to identify a timeline for QE tapering and any subsequent tightening in monetary policy, marked the first step towards an environment where yield spreads between physical commodities and financial instruments became sustainably less favorable, according to Morgan Stanley.

This threat has become a reality following a largely unexpected LME announcement on July 1 of a proposal to introduce significant new rule changes intended to break the logjam of metal in LME warehouses and subsequent delays in customer delivery times.

"While still a proposal, if the changes are adopted, we think the markets most impacted by these changes will be in already oversupplied aluminum and zinc. Given the substantial amount of metal in these warehouses, the LME system would temporarily become a supplier and we expect increased availability of physical metal to exert downward pressure on the LME price. By extension the feedstock market of alumina, which has a historical link to the underlying aluminum price, could also see significant price pressure. The fall in physical premiums for aluminum over the past two weeks is, in our view, only the beginning of this process," according to Morgan Stanley analysts.

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