By Andy Home
LONDON- Do London Metal Exchange (LME) stock movements have any market significance?
There was a distant time when everyone thought so. The LME’s daily stocks report was eagerly awaited for the light it shone on what was happening in the “real” physical metal markets.
If the report contained a surprise, such as a major delivery onto LME warrant, the market was collectively swift to price in the information.
That perceived relationship between LME stocks and metal prices, however, has been steadily eroded over the years as the market has learnt that movements of metal on and off exchange are more likely to be down to storage than market drivers.
The growth of a shadow LME storage network has further blurred any direct read-through from stock movements to underlying physical market dynamics.
Just occasionally, however, the LME’s daily stocks report does still generate a significant price response.
Such was the case last Wednesday, Feb. 26, when the report showed 62,325 tons of copper “arrivals”.
It was the largest single-day delivery of copper on record so the slide in the copper price after the report’s release was not entirely surprising.
However, the speed of the price reaction says a lot about who is still really paying attention to LME stocks. And it isn’t us humans.
The “arrival” of so much metal in the LME warehouse system over the course of a single day wouldn’t phase your average aluminum trader, given a long history of mega-tonnage movement in that market.
However, it was a record for copper, although not without precedent.
In fact, such copper “arrival events” have become ever more frequent over the last couple of years, large tonnages of metal turning up in the LME warehouse system over a concentrated time frame. An even larger tonnage, 74,475 tons, was warranted over the course of just two days in January.
These are not really “arrivals” in the true sense of the word. Such significant tonnages of metal don’t just turn up at port, get unloaded, placed into an LME warehouse and warranted in a 24-hour period.
Particularly when the inflow is split across several locations as was the case with last week’s copper deliveries. Metal hit the system in sizeable quantities at New Orleans (20,000 tons), Kaohsiung in Taiwan (12,675 tons), Busan in South Korea (16,675 tons) and Rotterdam (9,450 tons)
Rather, this is metal that was already sitting in an LME shed or at least in very close proximity. The “arrival” occurs when the owner presses the computer button to place the metal on LME warrant.
And the owner in this case evidently coordinated the warranting to achieve maximum market impact.
And whoever was behind the inflow did indeed make an impact.
It’s not evident from a daily chart, which shows LME three-month copper opening and closing the day at the same price of $5,670 per ton.
Indeed, in the rear-view chart picture the day’s trading activity looks no more than a pause in a mini downtrend that saw copper slide from a Feb. 17 high of $5,828 to a Feb. 28 low of $5,533 as fears over the coronavirus spread.
However, the real action played out over a much shorter period of time.
Within a minute of the stocks report release copper had fallen by $18 per ton with volumes on the LME’s Select electronic platform spiking to 555 lots.
Even that, however, doesn’t capture the full speed of the price reaction.
The stocks report was released on Refinitiv screens at 09.00.16 on that particular day and within the following second 89 lots (2,225 tons) traded with the price skidding from $5,666 to $5,658 per ton. .– Reuters
