FT Alphaville - Izabella Kaminska on the Collateralization of Commodities


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Excellent presentation from @ftalphaville, highlighting the #collateralization of #commodities by @izakaminska with charts on inventories and a conclusion as to the turn in #metals markets, potentially.

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FT Alphaville - Izabella Kaminska on the Collateralization of Commodities

  1. 1. Izabella Kaminska
  2. 2. “Thus the price must fall far enough to curtailproduction sufficiently to allow the surplus to beabsorbed within a period not so long as to eat up, bythe costly passage of mere time, too much of thespeculative holder’s anticipated gross profit.”- John Maynard Keynes
  3. 3. • Allowance for deterioration in quality• Warehouse and insurance• Interest charges• Remuneration for risks in changes of commodity value
  4. 4. }  “A miscalculation leading to heavy redundantstocks may prove ruinous if matters areallowed to take their course on principles oflaissez-faire.” 

John-Maynard Keynes, A Treatise on Money
  5. 5. New York Times, Archive, 1882
  6. 6. }  The copperrestriction in the US}  The rubberrestriction in thestraits settlementsand ceylon}  BAWRA organisationof carrying stocks ofAustralian/SA wool}  The coffeevalorisation of thebraziliangovernmentt}  The tin Valorisationof government offederated malaystates.
  7. 7. From FactivaFrom Factiva (noincidents pre-2003)
  8. 8. Societe Generale research
  9. 9. Courtesy of BespokeInvestment GroupCourtesy of BespokeInvestment Group
  10. 10. }  “Where traditional secured loans, backed by apledge of a warehouse receipt, were once thefinancing tool of choice, increasinglywholesalers are looking to enter repurchasetransactions or to “repo” the copper to bankswilling to participate in these structures.”}  - Reed Smith (Law news, May 2013)}  http://www.jdsupra.com/legalnews/issues-arising-in-commodity-inventory-fi-87797/
  11. 11. }  Where there are large stocks, a restriction of newproduction must be brought about somehow –either by so great a fall of price as to compelrestriction, or by an organised voluntary restrictionwhich will bring about the same result with a lessfall of price.}  Such a policy only becomes dangerous if the pricelevel aimed at is too high in relation to normalproduction costs, or if the producers, who join thescheme of restriction, do not account for asufficient proportion of the total capacity forproduction.
  12. 12. }  For as long as low or negative interest rates persist there will beno incentive to unwind these secured stocks – at least not untiltheir hedges/maturities expire.}  Whether these deals will be rolled depends entirely on speculatorexpectations.}  If speculators stop believing in the bull story and startdemanding compensation for unwind risk, prices will correct.}  Speculators will have to be replaced with production cuts, whichis exactly what’s all over the news now.}  Arguably, this is also what’s started to happen in gold, the mostover-warehoused commodity in the world.