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A few days ago, Metal Bulletin posed the question “is there really a problem with LME warehouse queues?”
A day or so after that, there was another piece describing how copper was being seduced into the warehouses of New Orleans by $100-per-tonne incentives.
One is tempted to say if there were no problem, then why write the second piece?
(Incidentally, how many copper producers are looking at that $100-per-tonne business and thinking it might make a good supplement to their less happily priced consumer business?)
The glib answer, given by certain elements of the financial services industry, is that of course there is no problem, it’s just a reflection of the way that a free market adjusts to changing circumstances.
In some ways, that’s an attractive argument; by and large, free markets are a good thing, and it’s important that they do evolve as the world around them changes.
But it is also in fact, in this particular case, a specious one. At the moment, the market is not free; it’s being heavily influenced by governmental actions.
Now, obviously, governments always influence monetary and financial policy – it’s one of the main things they do, to nudge the economy they control in the direction they want it to go.
Sometimes they get it right, sometimes they get it horribly wrong. Right now, the world’s economies (or at least, a substantial number of them) have a problem with debt: there’s too much of it, and it’s by no means easy to see how it will be repaid. That much the policy-makers understand.
Their reaction to that has been to flood their economies with new money. What they don’t like to admit is that this is a redistributive policy.
As the money supply increases, the “value” of that money decreases because there is more of it chasing the same goods and services. So the value of the debt decreases – if there is more money, then a constant amount of debt will become less significant.
That all sounds wonderful – make the debt (effectively) smaller, and everyone’s a winner. Well, no, not really. Those who hold cash rather than debts are not winners. As governmental policy deliberately devalues money, so their holdings become worth progressively less.
And, as a major plank of the policy causing them this problem is artificially low interest rates, the course of action they take is clear – buy and hold hard assets, rather than cash.
But governments like the policy because it pushes the immediate problem forward, and they can always hope things may change; to be fair, they are behaving – broadly – logically.
This is where the argument shifts from the theoretical to the practical; warehouse queues are a direct result of investors choosing hard assets. And let’s be clear – what they are doing makes perfect sense.
They are trying to protect either their own or their clients’ worth by investing in what seems to be a safer store of value.
This is not an exercise in banker-bashing; they are doing what current circumstances logically dictate they should do. So if everybody is behaving logically, where is the problem?
The market is essentially free, just being pushed around at the moment, in extreme circumstances, by governmental policy.
Shouldn’t we just leave it to sort itself out?
I don’t think so. If we see something is potentially creating future problems, surely it makes sense to point it out and attempt to inoculate the market against it.
Delisting Vlissingen for copper made sense, as did the decision by Pacorini to refrain from taking nickel that would have ended up behind the location’s queues for aluminium.
The proposals being discussed — including separate load-out rates for individual metals — are aimed at preventing other markets being infected with the same disease as aluminium.
If we look at aluminium, there is currently, let’s say, something more than 10 million tonnes of metal sitting in long-term storage, taking advantage of the economic situation I describe above.
If circumstances were not as they are, I believe that post-2008, the price would have dropped further (not being supported by warehouse-trade buying), which would have resulted in more and swifter production cuts.
That would have helped to balance supply and demand, which, after all, is what the fluctuating futures price normally does.
Instead, not only have production cuts been delayed, but stock is also a burgeoning stock which will serve to depress future prices when demand climbs again.
In other words, a well-meaning attempt to ease the financial crisis will have serious knock-on effects in the future, and that is the problem the warehouse trade and its attendant queues is telling us exists.
For all our articles about the warehousing debate, click here.
Lord Copper editorial@metalbulletin.com