40Faro_13November_Spencer

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Steven Spencer – CEO Traderight Ltd.
Fontanafredda, 13th November 2014
METAL MARKETS:
THE PRESENT SITUATION AND THE
DIFFERENT VIEWS OF PRODUCERS,
PROCESSORS, CONSUMERS AND
BROKERS

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Fare clic per modificare gli stili del testo dello schema
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40° FARO Club Meeting
12/14 November 2014 | Fontanafredda (Italy)
Material edited by Kauffmann&Sons – all rights reserved.
Ieri, Oggi e Domani
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The Background
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Total Assets in Commodity Exchange Traded Funds
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Chinese Copper Imports 2001-2013
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China’s short term lending and copper stocks
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LME Copper Price and marginal cost of most expensive producers 2005-2014
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Copper 1974 to Date - Price and Traded Volume
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Aluminium 1975 to Date – Price and Traded Volume
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LME Aluminium price and rising global production
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IERI
Yesterday
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Ieri - Yesterday
• The market is overloaded with stocks
• A massive credit bubble is created by banks
• In China there is huge leverage and a credit “Ponzi”
• The LME has moved away from its main purpose and has
become a money instrument,
• The LME price and premiums no longer reflect real supply
and demand.
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OGGI
Today
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Charles Li and Martin Abbott – the New and the Old
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Intraday Margining
• As soon as the LME member trades, the LME Clearing
House takes the original margin directly from the member’s
bank account.
• This means that the broker has no capital left to trade with.
• If the broker gives up the trade to another member, such as a
bank, then that member gets called for margin as well.
• The LME now holds two margins for the same trade. But
even worse, there is no mechanism for returning the money
before the next day.
• The result? The liquidity begins to dry up.
• Next, HK raises the margins and also the clearing charges.
• The result? It becomes almost impossible for any member to
offer free credit to customers as they used to, which makes
the volume go down further
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The Perfect Storm Develops
• Banks have been manipulating prices and warehouse queues and
now decide to stop proprietary trading and exit
• Consumers’ protests lead to a change in the warehousing rules
• Stocks begin to move out of LME warehouses into non-LME
warehouses
• Qingdao warehouse scandal has frozen credit and demand in China
• Chinese trading volume falls as all Chinese companies trade with
huge credit lines from brokers which from now on only banks can
afford because of intraday margining
• Backwardations appear making financing and hedging harder
• Volume and liquidity fall
• Risk becomes concentrated on banks who are ‘too big to fail’
• SMEs with finite balance sheets cannot compete with banks
• Dark pools emerge as banks develop algorithmic trading platforms
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DOMANI
Tomorrow
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DOMANI - Tomorrow
• Your broker will become mainly an executor unless the LME
moves to end-of-day margining
• Credit lines will disappear or be charged at high cost to
customers
• LME trading volumes will continue to decline as trading
goes off market
• Banks will create dark pools and trade with each other
• The credit squeeze and Chinese and Eurozone problems
will continue until there is rationalisation of production
• Demand will begin to exceed supply when China resumes
normality
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Armstrong Economics – Economic Confidence Model
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Arthur Burns
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