Chaos In Commodity Markets Draws Attention From Regulators

By Ag Metal Miner - Jul 24, 2022,

• Recently, the London Metal Exchange quietly withdrew its precious metals contracts due to low liquidity.
• Supply chain issues and uncertain demand has fueled volatility in commodity markets. 
• The chaos has put commodities of all kinds under an international regulatory microscope.

MetalMiner follows the LME (London Metal Exchange) very closely, as it remains the largest commodities exchange for base metal options and futures. Recently, we mentioned how the LME had quietly withdrawn its precious metals contracts due to low liquidity. However, that’s only part of the story when it comes to dwindling LME stock.

Both LME Stock and Prices are in Freefall

Last week, Reuters published an article detailing how LME warehouses held only 696,109 tons of registered metal at the close of June. It’s the lowest amount of available LME stock this century, and it should be pushing prices into bullish territory. However, ongoing fears of a looming recession are having the opposite effect. In total, the LME index has slumped 31% from its April high point. According to experts, LME inventories were cut in half over the first two quarters of the year. In fact, that June report represents a year-over-year drop of 1.67 million tons. Depending on who you as, it’s unlikely stocks or prices have hit bottom just yet. As of the time of the report, over 300,000 tons of the aforementioned estimate was still waiting to be offloaded. In terms of readily available supply, this means the LME sits at just around 390,000

A Rare Rift Between Price and Supply 

It doesn’t take an economics degree to see what’s happening with prices and inventories is rare. One of the first things traders learn is that when stocks of a commodity decline, the price should rise. With the LME stock, we have the opposite happening. As mentioned, recession fears are a big part of this. However, it would be nearly impossible to list out all the factors contributing to this “perfect storm.”

Related: Energy Market Madness Leads To Record-Breaking Coal Consumption

What does remain to be seen is whether or not this rare rift between price and supply will correct itself in the coming weeks. Back in June, Reuters reported that zinc stocks had all but disappeared from LME warehouses. Simultaneously, the price fell to a brand new low. As of this writing, they are hovering even lower – around $2,950.

One place we can look for an explanation is the supply chain, which has remained tight throughout the pandemic. In terms of lead, zinc, and tin, you can trace very significant supply disruptions for each metal. For instance, zinc smelters in Europe are shutting down due to energy costs. A major lead plant in Germany has yet to recover from a 2021 flood. Tin, on the other hand, has been in short supply for months due to coronavirus lockdowns.

Commodities in General Are Under the Microscope

Markets around the globe have been taking 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 in supply and demand. Just recently, the LME suspended nickel trading after a spike in volatility, prompting at least two lawsuits.

The chaos has put commodities of all kinds under an international microscope. So far, it seems many regulators don’t like what they see. While metal and oil futures boast a lot of tracking and transparency, the same can’t be said of other important products. This has led some organizations to seek new rules that would give them more leeway to predict market vulnerabilities.

So far, the Financial Stability Board, based out of Switzerland, has started scrutinizing commodities markets with renewed gusto. The same goes for The Bank of England, which is seeking more transparency on commodities trading in general. However, the investigations and any regulations stemming from them will take years.

In the meantime, the bulk of the pressure is on suppliers to fill those LME warehouses before the year’s end.

By AG Metal Miner