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United Nations Conference on Trade and Development
MULTI-YEAR EXPERT MEETING ON COMMODITIES AND DEVELOPMENT
21-22 April 2016, Geneva
How developing nations can efficiently use the commodity markets to manage their risk
By
Mr. Robert Fig, Head, Physical Market Sales, London Metal
Exchange
The views expressed are those of the author and do not necessarily reflect the views of UNCTAD.
Presented by Robert Fig UNCTAD
21 April 2016 – London
Recent developments and new challenges in the
commodity markets: Minerals Ores and Metals
1
The Ring: global reference price The home of global metals markets since 1877 with London trading routes back to 1500’s
1800’s 1950’s
1994-2016
Leadenhall Street
1970s
2016
#10 Finsbury Square
1970’s
2
The LME is the leading metal exchange LME Share of exchange metal traded
100%
92%
60%
100%
64%
91% 93%
74%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2015 LME market share
AA Al Cu NA Ni Pb Sn Zn
3
Global commodity markets are down
Data as of 14th April 2016
Source: LME, Bloomberg
Only Tin is up since 2007 whilst lead is flat
Losses as much as 72% Nickel and 87% Baltic Dry Index
0
50
100
150
200
250
300
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Copper 3 Month ($/mt) Nickel 3 Month ($/mt) Oil ($/bbl) Zinc ($/mt)
Aluminium 3 Month ($/mt) Baltic Dry Index Lead 3 Month ($/mt) Tin 3 Month ($/mt)
Tin +58%
Lead +2%
Nickel -73%
Baltic -87%
Oil -25% Cu -18%
Al -44% Zinc -55%
Index 2007=100
4
Natural resources exposure
Source: World Bank, 2014 data
Sum of resource rents as % of GDP
*additional benefits from manufacturing and equipment
33%
Angola: Oil 16%
Chile: Copper 16%
Zambia: Copper
7%
Australia: Iron Ore
8%
South Africa: Gold, PGM’s
6%
Indonesia: Palm Oil, Copper, Nickel
5
A diverse marketplace
Protect value of
mining assets
Protect margins
during smelting
process
Protect value of
physical stocks
Protect value of
metal content
Protect against
increasing material
costs
Mining Mining Companies
Smelters Smelter and
Refinery Companies
Consumers Cable, tube, and
automotive
companies
Merchants Trading Houses
Recyclers Recycling companies
Scrap trading
companies
Orders
Market
Makers Banks
Liquidity
Brokers Investors
6
Physical usage of LME Copper Identified Client Volumes by type
Identified Client contract volume
Source: LME Research
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Producer / Merchant /Processor / User
Money Manager Algo/Prop Broker Dealer / IndexTrader
Other Reportables
7
0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8
Hedging community dominates the LME Nickel Positions held by the hedging community outnumber money managers 1:1.6
* COTR Open Interest Ratio is for Long+Short average over one year
Entities are classified at broker discretion according to the primary function of the entity. Entities
may be involved in dual business
Money Manager Positions> Hedging Positions Hedging Positions> Money Manager Positions
CME Copper
Average over 12 months:
LME Copper
LME Nickel
8
Continued investment: physical relevance Pricing is anchored in the physical market thanks to a wide range of deliverable brands
Copper Aluminium Australia, 2 Australia, 4 New Zealand, 1
Copper Aluminium Oman, 1 Oman, 1 Egypt, 1 Iran, 1 UAE, 2 Bahrain, 1 Qatar, 1 Saudi Arabia, 1
Copper Aluminium China, 13 China, 17 India, 4 India, 8 Indonesia,1 Indonesia, 1 Japan, 8 Malaysia, 2 Laos, 1 South Korea, 2 Myanmar, 1 Philippines, 1
Copper Aluminium Canada, 1 Canada, 11 USA, 8 US, 9
Copper Aluminium Zambia, 2 Mozambique, 1 South Africa, 1 South Africa, 1 Cameroon, 1
Copper Aluminium Russia, 3 Russia, 11 Kazakhstan, 1
Copper Aluminium Brazil, 2 Argentina, 1 Mexico, 1 Brazil, 5 Chile, 22 Venezuela, 1 Peru, 3
Copper Aluminium
Bulgaria, 1 France, 2
Finland, 1 Montenegro, 1
Austria, 1 Slovakia, 1
Belgium, 1 Germany, 2
Germany, 2 Greece, 1
Norway, 1 Iceland, 3
Poland, 3 Netherlands, 1
Spain, 1 Norway, 6
Sweden, 1 Romania, 1
Spain, 2
UK, 1
9
Warehouse Locations Over 650 warehouses approved by the LME - 14 countries, 35 locations
& LME Shield with MOU to develop along Belt and Road routes
1. Johor, Malaysia 2. Singapore 3. Port Klang, Malaysia
1. Busan, South Korea 2. Gwangyang, South Korea 3. Incheon, South Korea
1. Nagoya, Japan 2. Yokohama, Japan 1. Baltimore, Maryland
2. Chicago, Illinois 3. Detroit, Michigan 4. Los Angeles, California 5. Mobile, Alabama 6. New Orleans,
Louisiana 7. Owensboro, Kentucky 8. Panama City, Florida 9. St. Louis, Missouri 10.Toledo, Ohio
1. Dubai, UAE
1. Antwerp, Belgium 2. Bremen, Germany 3. Hamburg, Germany 4. Genoa, Italy 5. Leghorn, Italy 6. Ravenna, Italy 7. Trieste, Italy 8. Moerdijk, Netherlands 9. Rotterdam, Netherlands
10.Vlissingen, Netherlands 11.Barcelona, Spain 12.Bilbao, Spain 13.Helsingborg, Sweden 14.Hull, UK 15.Liverpool, UK
1. Kaohsiung, Taiwan
Silk Road Economic Belt
Maritime Silk Road
10
LME remains the market of choice Copper Open interest in tonnes
0
2
4
6
8
10
12
14
16
18
Millio
n t
on
nes
LME SHFE CME
11
SHFE day trading bias
* Ratios taken over average of Q4 2015 – same trend LME>SHFE is consistent throughout
history.
LME volumes exclude admin and member give up trades
0x
1x
2x
3x
4x
5x
Aluminium Copper Zinc Nickel
Op
en
in
tere
st/
AD
V (
Q4
20
15
)
Open interest in days of volume
LME
SHFE
12
$8,000
$8,500
$9,000
$9,500
05
101520253035404550
Ma
r-1
6
Ma
y-1
6
Jul-1
6
Sep-1
6
No
v-1
6
Jan-1
7
Ma
r-1
7
Ma
y-1
7
Jul-1
7
Sep-1
7
No
v-1
7
Jan-1
8
Ma
r-1
8
Ma
y-1
8
Jul-1
8
Sep-1
8
No
v-1
8
Jan-1
9
Ma
r-1
9
Ma
y-1
9
Jul-1
9
Sep-1
9
No
v-1
9
Jan-2
0
Ma
r-2
0
Ma
y-2
0
Jul-2
0
Sep-2
0
No
v-2
0
Jan-2
1
Ma
r-2
1
Ma
y-2
1
Th
ou
san
ds
Open Interest LME Nickel 3 Month ($/mt)
LME holds further out positions
Data as of March 16th 2016
LME forward curve trades out to 63 months
Shanghai open interest is concentrated on one month
¥66,000
¥67,000
¥68,000
¥69,000
¥70,000
¥71,000
0
50
100
150
200
250
300
350
400
450
Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17
Th
ou
san
ds
Open Interest Last Price (CNY/mt)
LM
E
SH
FE
Nic
ke
l L
ME
Nic
ke
l
13
SHFE Nickel launches new arbitrage market
** Pre 7am % is limited to 3M outright on LMESelect
0%
5%
10%
15%
20%
25%
0
100,000
200,000
300,000
400,000
500,000
600,000
LM
E 3
Mo
nth
Sele
ct
($/m
t)
SH
FE
Nic
kel
AD
V (
lots
)
ADV SHFE Nickel (lots) LME NI %age pre 7am
SHFE Contract
launches March
27th
Pre launch avg: 8%
Post launch avg: 15%
14
© The London Metal Exchange (the “LME”), 2016. The London Metal Exchange logo is a registered trademark of The London Metal Exchange. All rights reserved. All information contained within this document (the “Information”) is provided for reference purposes only. While the LME endeavours to ensure the accuracy, reliability and completeness of the Information, neither the LME, nor any of its affiliates makes any warranty or representation, express or implied, or accepts any responsibility or liability for, the accuracy, completeness, reliability or suitability of the Information for any particular purpose. The LME accepts no liability whatsoever to any person for any loss or damage arising from any inaccuracy or omission in the Information or from any consequence, decision, action or non-action based on or in reliance upon the Information. All proposed products described in this document are subject to contract, which may or may not be entered into, and regulatory approval, which may or may not be given. Some proposals may also be subject to consultation and therefore may or may not be implemented or may be implemented in a modified form. Following the conclusion of a consultation, regulatory approval may or may not be given to any proposal put forward. The terms of these proposed products, should they be launched, may differ from the terms described in this document. Distribution, redistribution, reproduction, modification or transmission of the Information in whole or in part, in any form or by any means are strictly prohibited without the prior written permission of the LME. The Information does not, and is not intended to, constitute investment advice, commentary or a recommendation to make any investment decision. The LME is not acting for any person to whom it has provided the Information. Persons receiving the Information are not clients of the LME and accordingly the LME is not responsible for providing any such persons with regulatory or other protections. All persons in receipt of the Information should obtain independent investment, legal, tax and other relevant advice before making any decisions based on the Information. LME contracts may only be offered or sold to United States foreign futures and options customers by firms registered with the Commodity Futures Trading Commission (CFTC), or firms who are permitted to solicit and accept money from US futures and options customers for trading on the LME pursuant to CFTC rule 30.10.