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Dave Forest

Dave Forest

Dave is Managing Geologist of the Pierce Points Daily E-Letter.

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Are Prices For Every Metal About to Go Up 15%

The London Metal Exchange is hoping so.

The world's go-to market for base metals announced reforms yesterday designed to lift prices across the metals complex.

The moves are aimed at changing the way the Exchange warehouses copper, aluminium, zinc, and the other commodities it handles. Specifically, reducing waiting times for buyers to receive supply.

LME warehouses have been a hot issue of late. With numerous market players criticizing the company's lengthy queues for metals buyers. In some cases, metals purchasers have been waiting up to 600 days for Exchange warehouses to retrieve and deliver physical metal from inventory. The chart below shows the extended queues.

 

This has led some buyers to shun purchases on the exchange. Instead looking for alternative platforms like the OTC markets.

The end result being a long-running suspicion in the industry that LME prices actually run at a discount to the true market price for metals. If copper is trading at $3.50 per pound, the true market price might be $3.80. But buyers through the LME are applying a $0.30 discount because they know they'll have to wait months to actually get the supply.

This is a situation the Exchange wants to change. Yesterday it released a raft of new policies aimed at reducing waiting times at its warehouses. Largely involving requirements that warehouses de-stock metal at an equal or greater rate than new inventory is coming in.

This is a first-of-a-kind measure in the industry. And if it has the intended effect, it could push up prices for all LME-traded metals--by removing wait-time discounts from prices, and bringing them back in line with true market levels.

This of course doesn't change anything in terms of the real value of these metals. But it would create a major shift in the visibly-priced portion of the market. Especially given LME estimates that discounts for metals like lead and zinc may be running 10 to 15%.

This visible price is something many investors focus on, to determine the health of these sectors. If screens suddenly show metals prices rising 15%, it will get a reaction.

Something to keep in mind over the coming months as the reforms are implemented.

Here's to prices seen and secret,

By. Dave Forest


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