HOTLINE: Market needs merchants; betting the shed on warehouse window; cash is king

Metal Bulletin journalists take a look at three of the biggest stories of the week in this new series.

Metal Bulletin journalists take a look at the biggest themes of the week in this new series.

Metal market needs merchants now – and again in the future
Metals trading at commodity merchants Concord Resources and Gunvor has been on different trajectories in recent weeks.

Traders at Concord Resources’ London headquarters were setting up their desks and computers in the first week of January as the plunging Chinese equities market and falling oil prices gave commodities suppliers fresh reason to fear about the surplus markets they are trading.

Such stuff was merely inauspicious background noise for the launch of the company, backed as it is by between $100 million and $200 million in equity capital from Dwight Anderson’s Ospraie fund and other investors, including management.

Ceo Mark Hansen and his team of experienced traders in London, New York and Hong Kong found it no impediment.

On the last working day of January they finalised a $250-million financing facility with Goldman Sachs subsidiary J Aron & Co and have been trading with large suppliers and customers since the start of the year.

The role of the merchant is to take risks that the rest of the supply chain cannot manage and does not want, by offering financing, hedging, credit and distribution for suppliers and consumers.

In this environment, in which many believe prices are at or near cyclical lows, well-financed merchants are in a position to build substantial businesses.

But only with the right strategies, timing and risk management.

At the same time as Concord was opening, Geneva-based energy trading company Gunvor was winding down its base metals trading.

Decreasing prices and increasing counterparty risk put margins from base metals trading at the firm under pressure.

The company is sure to have wanted to wind down its positions in a vacuum, but news of traders’ departures made that impossible.

Even as wild rumours circulated in the market, less attention was paid to the likelihood that the firm was simply opting to close a desk where its strategy and approach was not paying off.

Does this mean Gunvor will not trade metals again? No.

Could it have stayed the course for longer? Sure.

But both Concord and Gunvor know that for as long as commodity markets exist, they will need merchants, to whom seizing opportunity and developing the correct strategy are crucial.

So too is timing.

And Concord’s 30-strong team will hope that the miserable markets of January 2016, unpromising as they looked, in fact gave the company the perfect launch date.

Betting the shed on taking the LME’s warehouse window
The relationship between the London Metal Exchange and some of its licensed warehouse companies has been fraught ever since queues drove up aluminium premiums from 2009 till 2014, facilitated by the strong contango in the light metal, low interest rates and surplus metal.

The creation of the warehouse bid as a result of the queues drove a wedge into the relationship between the LME price and the market price.

The latest moves to push up rents and FOTs by over 30% in some locations by some warehouse companies from April 1 has poured oil on the fire – taking place against a backdrop of higher costs and volatile currencies.

Warehousing company Metro, which the Reuben brothers bought from Goldman Sachs in 2014, was the most notable for the way in which it increased charges, although it was not alone in doing so.

The LME responded late last week, proposing to give companies a two-week window to modify their 2016-17 charges.

Providing it receives no objections to the proposal, a consultation will begin officially on February 5.

Applying rent-capping across the market would be a drastic action, reducing the capacity of independent commercial companies, many of which have done little other than lift their charges by a marginal amount, to dictate their own futures.

The LME itself acknowledges that legally it may have limited capacity to enforce rent-capping, and that warehouse companies would consider their own commercial prerogative as they worked out whether they could launch lawsuits.

In any case the LME would be unlikely to be willing to introduce rent-capping without another rewriting of the warehouse agreement, which would not come into force till April 2017.

Still, since the LME does have powers to investigate inducements and otherwise make life more unpleasant for its licensed warehouse companies, perhaps some form of compromise is likely.

It would not be surprising if Metro and others did not take the window offered by the LME to cut their proposed charges, with the advantage of having seen their rivals’ rates – although only a fool would bet the house on it.

Got the confidence to squeeze the physical market?
Around 60% of those that took part in a Metal Bulletin poll asking whether the metals markets have reached the point of maximum bearishness recently said that they believed not.

If that is one indication of a fragility in confidence, so too is traders’ willingness to sell whenever prices pop up by a few percentage points.

Cobalt, which Metal Bulletin assesses the price of twice a week, is a good example of this.

The average low-grade low price for cobalt rose 8% to $9.98 per lb in January from $9.24 per lb in December, according to Metal Bulletin’s price-book.

Despite anticipation of a fundamentally tighter market – Brazil-based producer Votorantim followed Glencore’s Katanga Mining in cutting production recently – some traders of the blue metal are happy to sell in the mid-$10s per lb, having secured spot and formula business in the low $9s per lb in December to take in that profit.

In the beleaguered manganese ore market, which Metal Bulletin tracks closely in its two indexes, which has been hit by widespread production cuts and business closures, strategies have varied in recent weeks.

Several suppliers who congratulated themselves for raising or sticking to their offer prices after the first signs of upside, were frustrated when one or two rivals placed massive volumes at low levels to get material out the door.

Cash is still king.

When traders start to squeeze markets harder it will be a sign that some confidence is returning.

Alex Harrison
Twitter: @alexharrison_mb