CORONADO, Calif. Financing deals have always existed in the metals trading world, and the London Metal Exchange is not to blame for warehouse queues, a senior executive at Aluminium Bahrain BSC (Alba) said.
"Cash and carry always existed. It existed in the 80s and 90s, and as long as you have a contango you will have a cash and carry," Jean-Baptiste Lucas, chief marketing officer at Alba, told AMM. "The only difference is that now it has been industrialized, as in all industries when you have a good way of making money. It is what the London Metal Exchange is meant to be forwe cannot complain about the LME being a financial tool."
The LME is meant to be a market of last resort, not first resort, he said. "Last resort means there are many other options before going to the LME to seek metal, which is why very few contracts ultimately go to physical delivery. Im not saying there is no issue, but that it isnt the LMEs fault. At the end of the day, the people to blame are more the banks than the LME, which is just being what it is meant to be."
Lucas said that warehouse queues are "part of the explanation" for record-high aluminum premiums, but noted that there has been a growing shift in the supply-demand balance. "The deficit has increased in North America and Japan. It has also deepened in Europe, despite the region not performing well and supply being cut. Its not surprising that in those conditions, premiums have increased," he said.
Lucas said that although the headline figure of warehouse inventories is at an all-time high, overall stocks in terms of days of consumption are low at 80 days. "This is lower than the 2009 level of 104 days and lower than the 1993 peak ... of course, the world was different then," he said, referring to a 1995 cutback agreement by the governments of major producing nations like the United States, Australia, Canada, Norway, Russia and the European Union.
The market adopts a psychological response to stock levels, he said. "Whether stocks are reported or not makes little difference. If 1 million tonnes is sitting in Russia and is now in Vlissingen (the Netherlands), it is still 1 million tonnes. It was not reported (earlier) and now it is, so people are more conscious of it."
The LME has been blamed unfairly for a trend over the past couple of years of banks and trading houses buying warehouse firms, Lucas said.
Some industry players have alleged that warehouse owners use their financial clout to finance metal, build queues and push premiums higher while having an insight into the future movement of metal into and out of the system, but the LME has a strict set of guidelines that warehouses must adhere to that are designed to prevent any illicit activities.
"The ownership of warehouses may or may not have an impact on premiums and queues, but what can the LME do? Is the LME at fault? Im not sure. Did it break any law? No, I dont think so," Lucas said. "There is an LME warehousing committee; there are tools and platforms to discuss. Theres no legal way to object to the ownership of private companies which comply with their regulations."