So, copper remains in a cash-to-three-month backwardation on the London Metal Exchange.
Not that many years ago, that almost seemed like the natural state of affairs.
But then the LME lending guidance was introduced, and the idea of artificially created backs seemed to be a thing of the past.
So is what we see at the moment a true reflection of global supply and demand, or are there other forces at work?
Certainly, the recent very large jump in cancelled warrants, which now stand at 73,600 tonnes, seems to imply a level of activity not totally connected with the physical world.
It seems likely that the purpose of that cancellation is to adjust a dominant position to bring it below the threshold that requires compliance with the lending rules.
The possibility of such manoeuvres has always been a weak point in the lending guidance, but this is probably the most pronounced example of such activity.
Does the dominant position holder own a warehouse and can it, by judiciously managing its cancelled versus live warrants, keep the game and the backwardation alive?
This is a big question when the power gets concentrated in an ever-decreasing number of hands.
And there is no reason that copper should be unique. While the warehousing and financing trade remains the only really big game in town, I cannot see why the same pattern will not be replicated across the metals.
And since financing and storing metal has traditionally been an activity subservient to the trading and consuming of it, it seems to me that this warehousing-backwardation play is an example of the tail wagging the dog.
In other words, gone are the days when warehousing was just a part of the supply chain – getting the metal to the right place for it to be used.
I have stressed before that I am not criticising the practitioners: in the particular set of economic circumstances in which we find ourselves, it would be naive not to play the game, and indeed would probably be a dereliction of duty to the shareholders, whose returns are central to the business.
But the reality is that the finance/warehouse trade is the biggest factor in the market at the moment, and that undoubtedly changes the dynamics.
If the production of metal for delivery to consumers in order for it to be used is of less significance than its production simply to be stored as a buffer against government-sponsored inflation, then it seems to me reasonable to assume that the traditional supply vs demand dynamic of the market will also be changed.
Thus, whereas in the past periods of high stocks would be unlikely to provoke a backwardation, and indeed a backwardation would be likely to attract new stocks and thus sow the seeds of its own destruction, I don’t think that is the case any more.
The conglomerates which own the metal in the warehouses – and largely own the warehouses as well – have the financial clout to keep the game alive for a very long time.
If prices start to drop, then by playing with their warrant holdings they can engineer a backwardation, which will probably also have the effect of supporting the price.
So there’s a double bonus – a backwardation when you’re long of metal, and the price being held up as well.
Of course, although we may have this world to look forward to, where prices do seem to be able to be held at levels inconsistent with the true consumption demand in a generally weak global economy, I do keep thinking of a historic parallel: sub-prime mortgages.
The banks thought they were leading us all to a new world, where they could lend money to people who appeared unable to pay it back, supported by an ever-rising property market, which negated the inability of the borrowers to repay.
Now look again at the copper backwardation: a slowdown in Chinese economic growth will be the first big sign that the gas is beginning to leak out of the bubble; soon after that, be ready for the banks to be crying for another handout of billions of dollars, as they, once again, rediscover that nothing goes up for ever.