Chaos in commodity markets draws attention from regulators
MetalMiner follows the LME (London Metal Exchange) index closely, as it remains the largest commodity exchange for base metal options and futures. newlyIn this article, we mentioned how the London Metal Exchange quietly withdrew its precious metals contracts due to low liquidity. However, that is only part of the story when it comes to the LME’s dwindling stock.
Both LME stocks and prices are in free fall
last week, Reuters He published an article detailing how LME deposits contained only 696,109 tons of the log mineral at the end of June. It’s the lowest available LME stock this century, and should push prices into bullish territory. However, persistent fears of a looming economic recession have the opposite effect. In aggregate, the LME index is down 31% from its April high. According to experts, LME stocks were halved during the first two quarters of the year. In fact, this June report represents an annual decline of 1.67 million tons. Depending on who you are, it’s not likely that stocks or prices have bottomed yet. At the time of reporting, more than 300,000 tons of the above estimates were still waiting to be unloaded. In terms of readily available supply, this means that LME sits at around 390,000
Rare difference between price and offer
It doesn’t take a degree in economics to know what’s going on with prices and stocks is a rarity. One of the first things that traders learn is that when stocks of a commodity fall, the price must go up. With LME stock, the opposite happens. As mentioned, recession fears are a big part of this. However, it would be nearly impossible to list all the contributing factors to this “perfect storm”.
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What remains is whether or not this rare dispute between price and supply will correct itself in the coming weeks. back in June, Reuters You reported that zinc stocks have almost disappeared from the warehouses of the London Metal Exchange. At the same time, the price fell to a completely new low. As of this writing, they’ve been hovering even less—about $2,950.
One place we can look for an explanation is the supply chain, which has been tight throughout the pandemic. Regarding lead, zinc and tin, you can trace very large supply disruptions for each metal. For example, zinc smelters in Europe are closed due to energy costs. A major major factory in Germany has not yet recovered from the flood of 2021. On the other hand, there was a shortage of tin months Due to the closures related to the Corona virus.
Commodities in general under the microscope
Markets around the world have taken hits from all directions since the pandemic first appeared on the scene. Now, more than two years later, we’ve seen unprecedented inflation, spikes in grain and energy prices, and countless disruptions to supply and demand. Recently, the London Metal Exchange suspended trading of nickel after a spike in volatility, prompting at least two cases.
The chaos put goods of all kinds under an international microscope. So far, many regulators don’t seem to like what they’re seeing. While futures contracts for metals and oil boast a lot of traceability and transparency, the same cannot be said for other important products. This has led some organizations to search for new rules that would give them more room to anticipate market weaknesses.
So far, the Financial Stability Board, based in Switzerland, has started audit Commodity markets with renewed enthusiasm. The same goes for the Bank of England, which is seeking more transparency about commodity trading in general. However, investigations and any regulations arising from them will take years.
Meanwhile, the bulk of the pressure is on suppliers to fill LME warehouses before the end of the year.
By AG Metal Miner
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