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Things are now getting worse at a slower pace than a few months ago, or, to borrow from G7 meeting speak, "the pace of decline in our economies has slowed and some signs of stabilisation are emerging". The "signs" are still faint and contradictory and global market sentiment continues to gyrate between cautious optimism that the worst is truly over and a nagging fear that it might not be. The LME complex too is caught between its early-April exuberance and the suspicion that the recent rally has been, as one bank described it, "too fast and too furious". The three-month price charts for all the big LME contracts show a turbulent, choppy week in which part of the previous weeks\' gains were given back. LME three-month valuations and cash-to-three-months spreads at Friday\'s valuations: Close Chg on Week Pct Chg
Aluminium $1,457 -$29 -2.0
Copper $4,470 -$335 -7.0
Lead $1,435 -$120 -7.7
Nickel $11,550 -$1,275 -9.9
Steel FE $330 +$5 +1.5
Steel Med $335 +$5 +1.5
Tin $12,600 +$350 +2.9
Zinc $1,420 -$137 -8.8 But the real action right now is in the less charted territory of LME spreads, wherein swim the modern-day monsters of the market\'s imagination. Predators, both old and new, are coming out to play. COPPER SQUEEZE(S) Copper, in particular, appears to be in the grips of a massive squeeze. It\'s happening in China where the front part of the Shanghai Futures Exchange (SHFE) forward curve remains heavily backwardated. Underlying liquidity in the form of SHFE stocks is threadbare at 15,051 tonnes. The local physical market seems equally depleted with spot premiums for imported metal rocketing. The Shanghai premium has been talked (not necessarily traded) as high as $300 per tonne over LME cash. By way of perspective, 2009 producer premiums were just $75 per tonne. It begs the question where 700,000 tonnes of imports went in the first three months of the year, but one thing is for sure. The surge of metal hasn\'t gone to help SHFE shorts deliver against their positions. Maybe that\'s why the government stockpile manager, the State Reserve Bureau (SRB), is rumoured to be freeing up some of its commitments for release to a local market in thrall to "copper-mania". London locals have been avidly following the Shanghai merry-go-round of rumour and counter-rumour as to the SRB\'s intentions but ominous things are also now happening to spreads in London. The front part of the curve has tightened up. The benchmark cash-to-three-month period ended last week valued at $14.0 backwardation. Backwardation is usually a trait of bullish markets, signifying a shortfall of metal for immediate delivery. It seems counter-intuitive for this to be happening at a time of collapsed demand and theoretical plenty, assessed last week by the International Copper Study Group at an expected 345,000 tonnes surplus over the course of the year. However, it is in the nature of the LME that you only get to trade what is on warrant and what is on warrant is falling at a rate that is starting to alarm some participants. Open tonnage at 363,750 tonnes is now back at levels last seen in the first days of January. Fresh cancellations are now coming primarily from stocks registered at European and United States locations. This might simply be the Chinese buying moving beyond largely-depleted LME warehouses in Asia but there are some dark mutterings "on the street" that other forces may be at work as
well. The move to front-month backwardation will do nothing to dispel fears that metal is being moved off-market in anticipation of further pressure on nearby dates. TIN STRANGLE Tin is providing a useful reminder of just how ugly bear traps can be. The front part of the tin curve has been in backwardation since the start of the year but was showing signs of easing around a week ago. However, the tightness flared again in the closing stages of last week. The cash-to-three-month period ended valued at $270 backwardation with "tom-next", the shortest-dated spread and the best indicator of cash-date tightness, trading at $45 backwardation on Friday morning. LME stocks of tin have rebuilt by around 4,000 tonnes this year but at 12,210 tonnes remain historically very low and are tightly controlled. The previous dominant long position holder loosened its grip somewhat last week but was joined as of Wednesday in the LME\'s compliance reports by a second player. LEAD PINCH A dominant long position has become a daily feature in the lead market, which flipped into front-month backwardation the previous week. The pressure on nearby dates abated over the course of last week, the cash-to-three-months period finally returning to small ($3.00) contango on Friday, partly thanks to a hefty 8,800-tonne inflow at LME warehouses the previous day. However, the lead spreads still look dangerous and bears should heed the assessment by the International Lead and Zinc Study Group that the global lead market will record only a marginal 37,000-tonne surplus this year, global manufacturing recession notwithstanding. That does not promise much in the way of a rebuild in LME stocks, which remain at distress levels at under three days\' worth of global consumption. WHAT NEXT? No such dangers for either nickel or aluminium, of course, given the huge LME stock increases seen in both metals this year. However, even in nickel the nearby contango has deflated with worrying speed. Cash-to-three-months metal was valued last Friday at $56 contango. Two weeks ago the period was over $100 contango. The sharp rise in cancelled nickel warrants may be a part explanation but with bear traps opening up elsewhere in the LME complex the collapse of the nickel contango is more food for contrarian thought. And who told you there\'d be plenty of metal around, just because the world is in the grips of the worst economic contraction since the Great Depression? Was it an aluminium trader?
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