The London Metal Exchange (LME) has introduced new rules allowing for deferral in order to prevent future squeezes on its warehouse inventories. These rules come with costly fees, however, and traders on the LME have expressed concern over the dwindling inventories. The tight stockpiles reflect the tension that has gripped metals markets for much of this year, a result of constrained supplies and worries about weakening demand due to recessionary threats in the world’s key economies. This comes in the wake of one of the most tumultuous years in the exchange’s 145-year history. The LME is currently facing regulatory probes and lawsuits related to its actions during a nickel market squeeze in March that brought several LME dealers to the brink of default. The results of an independent review into the crisis are expected to be published soon.
Why it matters
The low stockpiles in LME warehouses could have a significant impact on trading, as every short seller who holds a contract to expiry must deliver physical metal registered in an LME warehouse. This means that low inventory levels can limit the ability of traders to make deliveries, leading to potential squeezes on the market. This debate over the outlook for metals supply and demand has become increasingly contentious, with concerns about constrained supplies on the one hand and worries about weakened demand due to economic recession on the other. Copper in particular is a source of disagreement, with some analysts predicting ongoing deficits and others seeing the market swinging into oversupply. These divergent predictions have led to a sharp divide in price outlook, with some analysts predicting record highs while others anticipate a drastic drop. The prices of other metals such as zinc and aluminum have also decreased by over 10% this year. While nickel is currently trading in positive territory, concerns over low liquidity continue to hamper the market. The overall situation remains uncertain as the industry looks to replenish threadbare reserves, and as China’s recent reopening from COVID lockdowns creates additional unpredictability.