WAREHOUSING: More volatility in LME spreads in 2018 on low stocks, strict warehouse rules

London Metal Exchange benchmark spreads have had a rollercoaster year in 2017 and next year is not looking any calmer given the low level of registered stocks and sustained strict LME warehouse rules, which could prompt frequent backwardations similar to what zinc is experiencing.

Zinc’s cash/three-month spread reached $91 per tonne backwardation on October 12, the widest backwardation in more than 10 years, before easing back to around $30 per tonne following LME stock re-warranting in New Orleans.
“I think zinc recently has set the tone of what to expect across the [LME base metals] complex next year,” an industry source said.
“I don’t think the impact of the new warehouse rules have been fully felt due to the low price volatility but if even a little volatility emerges in the underlying market - like zinc has - then the warehouse stock reaction magnifies that, which in turn causes a volatile feedback loop,” he added.

The LME toughened its warehousing reform in 2015 when it implemented its load-in/load-out (LILO) rule, which forced operators with queues to deliver more tonnage than they take in. In 2016, it got even stricter with increased load-out requirements,...


Perrine Faye

December 05, 2017

14:13 GMT