Chaos in commodity markets draws regulators’ attention

MetalMiner follows the LME (London Metal Exchange) very closely, as it remains the largest commodity exchange for base metal options and futures. Recently, we mentioned how the LME quietly withdrew its precious metals contracts due to low liquidity. However, this is only part of the story when it comes to the decline in LME stocks.

LME stocks and prices are in freefall

Last week, Reuters published an article detailing how the LME warehouses contained only 696,109 tonnes of recorded metal at the end of June. This is the lowest amount of LME shares available this century, and should push prices into bullish territory. However, lingering fears of an impending recession are having the opposite effect. In total, the LME index has fallen 31% since its peak in April. LME stocks have been halved in the first two quarters of the year, experts say. In fact, this June report represents a year-over-year decline of 1.67 million tonnes. Depending on who you are, stocks or prices are unlikely to have bottomed out. At the time of the report, more than 300,000 tonnes of the above estimate were still waiting to be unloaded. In terms of readily available supply, this means the LME sits at around 390,000

A rare break between price and supply

It doesn’t take an economics degree to see what’s going on with prices, and stocks are rare. One of the first things traders learn is that when the inventory of a commodity goes down, the price should go up. With the LME stock, the reverse is happening. As mentioned, recession fears are a big part of that. However, it would be almost impossible to list all the contributing factors to this “perfect storm”.

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It remains to be seen whether or not this rare gap between price and supply will correct itself in the coming weeks. Back in June Reuters reported that zinc stocks had all but disappeared from LME warehouses. Simultaneously, the price fell to a brand new low. As of this writing, they are hovering even lower – around $2,950.

One place we can look for an explanation is in the supply chain, which has remained strained throughout the pandemic. For lead, zinc and tin, you can trace very significant supply disruptions for each metal. For example, zinc smelters in Europe are closing due to energy costs. A major lead factory in Germany has yet to recover from a 2021 flood. Tin, on the other hand, has been in short supply for month due to coronavirus lockdowns.

Products in general are under the microscope

Markets around the world have been hit from all sides since the outbreak of the pandemic. Today, more than two years later, we have witnessed unprecedented inflation, spikes in grain and energy prices, and countless supply and demand disruptions. Just recently, the LME suspended nickel trading after a spike in volatility, prompting at least two trials.

The chaos has placed commodities of all kinds under an international microscope. So far, it seems many regulators don’t like what they’re seeing. While metals and oil futures offer a lot of tracking and transparency, the same cannot be said for other major commodities. This has led some organizations to seek new rules that would give them more leeway to predict market vulnerabilities.

So far, the Swiss-based Financial Stability Board has started scrutinize commodity markets with renewed enthusiasm. The same goes for the Bank of England, which is seeking more transparency on commodity trading in general. However, the resulting investigations and settlements will take years.

In the meantime, most of the pressure is on suppliers to fill these LME warehouses before the end of the year.

By AG Metal Miner

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