LME Copper: Reflecting global supply and demand in the copper price. Matthew Chamberlain Metal Bulletin Copper Conference 26 February 2015

Transcription

1 LME Copper: Reflecting global supply and demand in the copper price Matthew Chamberlain Metal Bulletin Copper Conference 26 February 2015

2 Copper price Copper volumes and volatility Percentage Thousand lots LME copper: volume, price and volatility Reflecting supply and demand dynamics Volatility (LHS) LME copper volume (RHS) ,500 8,000 7,500 7,000 6,500 6,000 5,500 5,000 Price (US$/tonne) 1

3 Physical and financial liquidity Mutually-reinforcing usage of the LME market Industrial users Real-money financial users Algorithmic traders Core participants in the LME market Physical participants provide underlying price relevance to the market LME market structure provides features (date structure, physical settlement) to ensure ongoing relevance to the physical market Participate in the market to express fundamental views on the underlying metals May additionally arbitrage with physical metal holdings Provide market liquidity and arbitrage-based price convergence Recognised concerns with high frequency traders Physical contract structure ensures price convergence to the underlying warrant Maximum participation ensures enhanced liquidity LME COMMITMENT TO THE MARKET 1 2 Warehouse reform programme Commitments of Traders Report 3 4 Understanding the LME user base Roadmap to enhanced liquidity 2

4 To be discussed Consultations ended 9-Feb-15 Delivered 1 Warehouse reform programme 12 item package of reforms announced in 2013 Creation of Physical Market Committee plus ongoing six-monthly reviews Enhanced LME investigation and action powers for artificial queues Separate load-out rate for steel Enactment of LILO (as of 1-Feb-15) Further Warehouse data transparency Commitments of Traders transparency Best-practice information barrier policy Enactment of warehouse logistical review Enactment of Warehouse Agreement legal review Rule changes to facilitate premium hedging solutions Assess powers to limit rents in queues as a future policy option Assess structural solution to high charges 3

5 Waiting time (calendar days) 1 Queue lengths by metal Copper queues addressed by July Primary Aluminium Copper, Aluminium Alloy NASAAC, Zinc and Lead 0 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Molybdenum, Steel, Tin, Nickel and Cobalt Data as of 31-Jan-15 4

6 Net load-in (thousand tonnes) across 5 affected warehouses Behavioural divergence (queued vs non-queued warehouses) 2013 net load-in across 5 affected warehouses 1 Behavioural change driven by LILO Clear behaviour change which has stopped queues growing (100) (200) Jul-13 Consultation on LILO Rule announced METRO DETROIT / PACORINI VLISSINGEN ALL OTHER LME LISTED WAREHOUSES TOTAL GROSS LOAD-IN ktonnes 1,338 ktonnes 1,879 ktonnes GROSS LOAD-OUT ,711 ktonnes 1,729 ktonnes 3,441 ktonnes LOAD-OUT / LOAD-IN 3.2x 1.3x 1.8x 5

7 2 Commitments of Traders Report (CoTR) Reports designed to increase transparency as per the industry standard Frequency COT reporting Weekly Money Manager Delay Information Each Tuesday, for the previous week s data First reports published on 5- Aug-14, for week Mon 28- Jul-14 Fri 1-Aug-14 5 reports, one for each day of the previous week Breakdown of open interest in LME traded contracts Summarised following predefined classifications Producer / Merchant / Processor / User CoTR Broker Dealer / Index Trader Dissemination approach Free to all users Via the LME website Via data vendors Other Reportables Not Defined 6

8 % SHORT % LONG 2 LME copper in the Commitments of Traders Report Tracking long and short open interest by category 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 28/07/ /08/ /09/ /10/ /11/ /12/ /01/2015 8,000 7,500 7,000 6,500 6,000 5,500 5,000 4,500 4,000 Money Manager Broker Dealer/Index Trader Producer/Merchant/Processor/User Other Reportables Price in US$ (RHS) 100% 8,000 90% 7,500 80% 70% 7,000 60% 6,500 50% 6,000 40% 5,500 30% 20% 5,000 10% 4,500 0% 4,000 28/07/ /08/ /09/ /10/ /11/ /12/ /01/2015 Money Manager Broker Dealer/Index Trader Producer/Merchant/Processor/User Other Reportables Price in US$ (RHS) 7

9 3 LME prompt date structure The LME s prompt date structure runs daily for the first 3 months, then weekly until the end of the 6 th month and then monthly out to 123 months, for Copper and Aluminium Illustration of the three phases of the LME s prompt date structure 1. Daily 2. Weekly 3. Monthly Tomorrow 3M 6M 123M Daily prompt dates: Cash to 3 Months Weekly prompt dates: Wednesdays, 3 months to 6 months Monthly prompt dates: 3 rd Wednesday, 7 months to 123 months 3 rd Wednesday 3 rd Wednesday prompt dates are available in all months Trading horizon for other metals: Lead, Nickel and Zinc out to 63 months, Aluminium Alloy and NASAAC out to 27 months, Tin, Steel Billet, Cobalt and Molybdenum out to 15 months 8

10 3 Understanding the LME user base Physical Users Financial Users 3M 3 rd Weds carry Link between daily and monthly prompt dates Significant internalisation by market-makers 3M outright 3M other date carry TomNext carries Most common outright trade Core LMEselect liquidity Adjusts to precise client requirement within the LME s daily date structure Second most common carry trade Monthly outright 3 rd Wednesday to 3 rd Wednesday carry 3 rd Wednesday outright Requested by many financial users of the market Futures roll transaction 9

11 Lots (thousands) Lots (thousands) 3 Where does open interest sit on the LME? Open interest distribution clearly demonstrates market demand for monthly exposure LME COPPER MARKET OPEN INTEREST 22-FEB % of Cu open interest sits on 3 rd Wed dates Other prompt 3rd Wed 350 LME ALL METALS MARKET OPEN INTEREST 22-FEB % of all open interest sits on 3 rd Wed dates Dates up to Dec-16 only Other prompt 3rd Wed 10

12 4 LME s pathway to enhanced liquidity Delivering an optimised market structure Direct client access to market data 1 Optimise tick sizes 2 Promoting monthly liquidity Increase participation Order / trade ratio 3 Incentive programmes Potential chaining solutions Pre-trade risk management 1. Change effective from 24 March For further details please consult Notice 14/052 : A Change effective from 19 January For further details please consult Notice 14/358 : A Change effective from 16 March For further details please consult Notice 15/060 : A060 11

13 4 Copper tick size Enhancing liquidity at each pricing point LME SELECT TICK SIZE (US ) TICK VALUE / NOTIONAL VALUE (BPS) bps bps Pre-reform Post-reform Pre-reform Post-reform 12

14 4 Pre-7am LME copper trades Serving the needs of Asia timezone users 3M outrights daily volumes on Select 25,000 Volume (lots) 20,000 15,000 10,000 5,000 0 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 13

15 Some of these items may be subject to consultation

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