Re-evaluating cancelled warrants

Posted by Izabella Kaminska on Jun 17 09:01. 7 comments | Share

There was a time when the metals industry could look upon cancelled London Metal Exchange warrants as a sign that demand for physical metal was rising.The cancellation of the warrant, after all, meant someone was ready to take delivery of the metal in question, More…

There was a time when the metals industry could look upon cancelled London Metal Exchange warrants as a sign that demand for physical metal was rising.

The cancellation of the warrant, after all, meant someone was ready to take delivery of the metal in question, taking it out of storage for sale into the real physical market.

At FT Alphaville, however, we’ve recently observed that’s not necessarily what is happening nowadays. Metal is still being taken “off warrant”, but rather than being transferred into the physical market it’s ending up in non-LME storage facilities or simply being classified private non-LME registered stock in the very same warehouses. Kept out of sight, so to speak.

It’s a problem analysts are finally becoming acutely aware of.

 

Citi’s latest note on aluminium reflects the concerns. As their metals analysts commented this week (our emphasis):

LME Cancelled Warrants have surged to extremely high levels in recent weeks. The issue now is deciding whether this is merely a large holding being transferred to another warehouse – on the back of a better rent deal – or whether consumers are ‘canceling’ in anticipation of long delays in getting hold of their material.

The ‘storage shuffle’ is not exclusive to the aluminium market, however. Copper too is displaying curious warehousing patterns.

Analysts, for example, have been keenly reporting that copper stocks held in Chinese bonded-warehouses in Shanghai are being offloaded into the domestic market (finally). In their opinion the destocking is behind the recent fall in Chinese copper imports, a factor which mitigates the idea that overall domestic copper demand in China has fallen too.

Though, as Sean Corrigan at Diapason Commodities observes, there is actually some ambiguity as to whether the copper has really been consumed. LME warehouse stocks in Asia have been seeing their inventories rise.

If you add the two data sets together you thus get an overall inventory level which hasn’t changed all that much at all — and one which remains at multi-year highs:

So is it destocking? Or, storage shuffling?

If the latter, the incentive to shuffle out of bonded warehouses and into Asian LME warrants seems to have come around the same time the Chinese government cracked down on commodity financing deals at the end of March.

Probably not a coincidence.

Related links:
The curious case of un-cancelled warrants – FT Alphaville
China’s bonded-warehouse copper mystery
– FT Alphaville

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