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The True Cost of Manipulation

It was a great wheeze wasn’t it?

Buy up a few LME warehouses. Stuff them with metal and make it difficult for title-owners to deliver out. It worked for a while. By my estimation, for about 7 years; with prices peaking ($10,000 per mt for copper in 2010) in inverse proportion to the state of the world economy at that time.

If you listen to some accounts, it is made to sound unplanned. JP Morgan, some say, found themselves by chance proud owners of Henry Bath & Son, the oldest LME warehousing firm, through the acquisition of the old Metallgesellschaft business. They weren’t really sure what to do with the asset until a bright spark in the trading division realised the potential.

Following the Lehman Brothers crash, and the start of quantitative easing, the stars started to align towards something profitable; a mechanism that, while legal, was actually a perversion of the intentions of a free market.

With tramp money searching for a home, a flight into metal made sense. If, on top of that, it would be possible to create a pinch point, by which stocked metal could fetch a premium despite the apparent surplus of it, then all the better – and more justification for stocking the warehouses with base metals.

So began the warehouse wars, only beginning to unravel with the sale of the LME to the Chinese in 2012 and the further alignment of China’s interests with those of U.S. aluminium can-makers. If there was one thing they both wanted – it was lower prices.

What I do not want to do is rehearse the past.  However, what we have seen in the last few weeks is actually the true cost of manipulation, made visible by the collapse of the share price of those most closely associated with the wheeze and, at the same time, most exposed to base metal prices. I am afraid Glencore tops the list (£5.30p to <£1.00 per share, 2011-15). Let me make clear, Glencore, I am sure, will recover, just as prices will. However, what the warehouse wars tell us, through the travesty of $250 per mt premia with 5 million tons of aluminium slumbering in LME warehouses, or 12.5% of world demand, is that manipulation delayed decision-making.

Three years ago my opinions were sought by a leading FTSE100 Plc.  Objecting to being forced to listen to the company’s corporate propaganda video before being ushered up in the lift, the meeting was conducted on a formica-topped table in the foyer rather than the boardroom. My listeners were five or six fresh-faced analysts employed, it was supposed, to report to the directors. I tried to make a simple case to pass on. Fine (or not so fine), it seemed to me, if the lay person believed in the prices then prevailing, but they, I tried to suggest, as a responsible producer, needed to be aware that skewed LME prices could lead to skewed decisions;  decisions on investment, projections of profit, decisions on whether to pare back production.

There was a wider point too, I said. With skewed LME prices, companies (like their own) would be over-valued on the stock exchange and in turn pension funds would be over-exposed and in turn this would link to ordinary citizen’s lives.  It depends at what date you take it, but the FTSE-100 was at least 35% capitalised to commodity companies in the last few years, which has meant that wrong prices on the LME had the potential to strike at the heart of the financial system.

Well now we are here. Pension funds have indeed been decimated, but the greatest disaster has been for commodities companies. It seems the delusion of prices was believed by the manipulators themselves. Instead of using the breathing space of skewed LME prices to reduce output and sell assets, belief in such chimeras as the ‘super cycle’ penetrated the boardrooms of even the hardened and the fickle themselves. I have a feeling it is a phrase that won’t be coming back into fashion for a while. It makes the point that coining words or phrases that sum up a financial mood can go out of date quite quickly. Who, for example, bearing in mind Brazil’s and China’s difficulties, thinks the BRICS acronym is a great idea anymore? These are all coinages and, rather like other forms of currency, can be subject to devaluation.

Interestingly, the financial system hasn’t quite collapsed yet, while the share prices of those who should have known better have.

Justice?  As they say in our office ‘you don’t want to believe your own bullshit.’

Published September 30th 2015 on