LME inventories low for industrial metals

The London Metal Exchange will enter 2023 with the smallest available warehouse stockpiles in at least 25 years, setting the stage for future squeezes and spikes if demand turns out stronger than expected.

Available inventories of the six main metals traded on the LME plunged by two thirds in 2022, with aluminum’s 72% decline accounting for the bulk of the drop, while zinc shrank by 90%. Collectively, inventories not already marked for withdrawal hit the lowest level in data going back to 1997 on Thursday, and finished the year only fractionally higher.
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The London Metal Exchange needs to overhaul how it oversees live trading to prevent another market collapse after it was forced to cancel $4 billion in nickel trades, a report into the fiasco says.

The exchange needs to improve its risk and control functions and upgrade its volatility controls, according to consultants Oliver Wyman, who were commissioned by the LME to review what caused the March 2022 crisis in the nickel market.

The exchange cancelled $4 billion in trades on March 8 after a short squeeze stemming from a position held by Chinese steel manufacturer Tsingshan sent nickel prices soaring by more than 240%.

The move erased an estimated $1.3 billion of gains for long position holders. In the aftermath of the incident, nickel trading was suspended for more than a week.

Oliver Wyman investigated the events that led up to the breakdown, including the growing threat of sanctions on Russian nickel producers and low nickel warehouse stocks. Following the invasion of Ukraine on Feb. 24, nickel prices rose in line with other metals, and bid-ask spreads remained at typical historical levels, it found.

But “large short positions had been built-up by a number of participants long before concerns over the invasion of Ukraine surfaced,” the report said. “Two positions, both with significant [over the counter] components, were particularly large in relation to the financial resources of their owners.”
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The London Metal Exchange (LME) won a legal battle with U.S. financial firms on Wednesday which brought a case demanding $472 million in compensation after the exchange cancelled billions of dollars in nickel trades last year following a surge in prices.

Hedge fund Elliott Associates and market maker Jane Street Global Trading brought the case after the world's largest metals marketplace cancelled $12 billion in trades when prices shot to records above $100,000 a metric ton in a few hours of chaotic trade in March 2022.

In its written ruling, London's High Court said the LME could cancel trades in exceptional circumstances and was not obligated to consult market players prior to its decision.

"This judgment recognises the LME’s obligation to maintain orderly markets and its powers to intervene to this end, including by cancelling trades," the LME said.

Other exchanges were closely watching the case because it could have wider ramifications on their ability to react to crisis situations.
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Hedge fund Elliott Associates was granted permission to appeal its loss in court against the London Metal Exchange over a nickel squeeze, extending the legal battle over the latter's decision last year to cancel billions of dollars worth of trades.

Elliott applied to the English Court of Appeal and was granted permission to appeal the judgment that went in the LME’s favor last month, according to a filing from Hong Kong Exchanges and Clearing Ltd., the parent company of London Metal Exchange.

The timing of the appeal, which it plans to contest, is yet to be determined, according to the disclosure today.
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The London Metal Exchange (LME) on Saturday banned from its system Russian metal produced on or after April 13 to comply with new U.S. and UK sanctions imposed for Russia's invasion of Ukraine.
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The announcement of the ban was made while trading was closed for the weekend.

One industry source, speaking on condition of anonymity, predicted price reaction would be muted when trading resumes in Asian time on Monday, while another said a repeat of the kind of aluminium price jump spurred by U.S sanctions on Rusal in April 2018 was possible.
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The officials said continued trading of Russian metals off of the exchanges is expected to be at a discount and that it does not restrict supply.

The share of available aluminium stocks of Russian origin in warehouses approved by the LME stood at 91% in March, while the proportion of copper stocks rose to 62% from 52% in February. Russian nickel in LME warehouses amounted to 36% of the total.

The high share of Russian-origin metal in LME inventories has been a concern for some producers, who compete with Russia's Rusal, and some Western consumers who have avoided Russian metal since Moscow's invasion of Ukraine in 2022.
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One week after catching wind of the scheme, the London Metal Exchange (LME) has announced new plans to close loopholes that allow traders and warehouse operators to game the latest series of sanctions on Russian metals.

As reported last week, with the ink on the new sanctions barely dry, UK traders immediately began making deals with LME-approved warehouses to profit off the massive stocks of Russian metal that were already in storage and sanction-free (type 1 under the rules) by ‘withdrawing’ them on paper, then resubmitting them as sanctioned (type 2) metals, whereupon they made deals with the warehouses to split the profits on the indefinite rent these now-untradeable metals would accrue.

Bloomberg reporters called it “the latest episode in a rich history of traders seeking to exploit loopholes to profit from giant stocks of aluminum on the LME, which can generate hundreds of millions of dollars a year in storage and handling fees.”
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Now, the LME has updated its regulations in an attempt to close the loopholes that make the scheme legal and profitable.
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In another section, the LME tersely addressed the misuse of the profit-splitting rent agreements themselves.
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Barring further ingenuity by LME traders, the updated rules should eliminate the scheme and allow the type 1 metals stocks already in approved warehouses to act as a supply buffer for the Western markets, as intended.

Still, even if they are enforced to the letter, the sanctions may not succeed in starving the Russian war effort. According to a recent report from ING, the end result of the new sanctions regime will be an even greater share of Russian metal flowing to sanction-neutral countries, at ever-lower prices.

“The LME is a market of last resort for the physical metals industry,” the ING report noted. “Although most metals traded globally are never delivered to an LME warehouse, some contracts stipulate that the metal should be LME deliverable. This means that Russian companies will be forced to accept lower prices. Russia-origin metals will trade at even wider discounts and continue to flow to sanction-neutral countries, like China, the world’s biggest aluminium consumer.”

The bank said that China “is likely to continue to buy discounted Russian material to use domestically” while exporting their own domestically-produced and unsanctioned aluminum to Europe and the U.S. to fill the supply gap, effectively buying low and selling high.

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