London Metal Exchange at mercy of Glencore & JP Morgan « Mining Blog

London Metal Exchange at mercy of Glencore & JP Morgan

30. May 2012,

The London Metal Exchange (LME) operates an “Open Cry” and electronic trading floor for some of the world’s most important metals – including copper, aluminium, tin, nickel, zinc, lead, cobalt and steel products.

It’s commonly believed that LME warehousing of physical metals is what keeps the system sound. Possession of verified stocks helps maintain a balance between supply and demand. So, to protect the interests of producers and consumers from sudden rises or fall in prices, the LME itself may release some of these supplies into the market.

But, in reality, only a small proportion of LME warehouse stocks are used for this purpose. Known as “a market of last resort”, the mechanism is triggered in a relatively small number of instances.

Otherwise, most of what is held in the LME warehouses are employed for hedging purposes – to underpin futures and options contracts.

Last week,the manner in which one of the LME’s clients, Glencore, is exploiting warehousing for its own ends, came under scrutiny.

Moreover JP Morgan – one of the banks which enjoys all privileges of the LME – was also accused of threatening the stability on which the Exchange is predicated.

Glencore is now accused of “tightening its grip on the global zinc market by moving material to inaccessible locations, forcing industrial users to pay high physical premiums for a metal that is in surplus”.

With a reported 60% of the world’s zinc trade under its control, Glencore is allegedly using warehouses, monitored by the London Metal Exchange, “to stow away the metal and support [its own] premiums”.

Disturbingly, what Glencore is doing isn’t illegal under LME rules.

For its part, JP Morgan is now proposing to launch an Exchange Traded Fund (ETF) based on the acquisition of huge amounts of copper.

This poses the alarming prospect of a “removal of all or substantially all of the [copper] stocks in all of the LME warehouses in the US”, according to a US law firm.

If allowed, the move could cause an immediate spike in the cash price for copper, with manufacturers and fabricators having to pass these increases on to their customers.

These are two glaring examples of the way in which the London Metal Exchange is exposed to manipulation by some of its own members.

The LME is increasingly looking like a body being ruthlessly undermined by the naked greed of a few of its own bona fide members.

And it seems powerless to stop them doing so.

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