The London Metal Exchange's billet futures contract stands to shed stock from its global warehousing network after one major player canceled up to 75% of the physically-delivered contract's warranted tonnage Monday to sell material in the physical market, participants said Friday.
More trading houses participating in the futures contract joined the cancellation spree Tuesday, when canceled warrants reached 46,930 mt, or 84% of the total 55,380 mt LME billet stock, according to a source close to the activity.
Total stocks in the exchange's registered warehousing network have fallen every day but one since Monday, finishing the week at 54,015 mt -- the lowest since August 16.
Users of the contract hoped that the cancellation signaled warranted billet being moved to a different warehouse, perhaps having found better incentives from another warehousing firm.
Even the possibility of the material being re-warranted at the same warehouse was talked about; but this is not the case, in small part due to charges for putting material back on warrant at warehouses, according to the source.
Now that the cash price on the LME contract has risen to $690-700/mt on a bid/ask basis -- compared with physical billet offers of $700-710/mt CFR Turkey from Black Sea suppliers -- the trading house will sell warehouse material to roll into reinforcing bar and other long products
A billet shortage in major commercial trading areas such as the Black Sea has driven up prices.
"The LME billet price was too low [compared with the physical market price] so people bought onto the contract a few months ago," the source said. "Those same people are now selling material they bought then on the physical market; unless the LME price rises to better reflect the physical market, this will continue to happen."
The LME cash price has risen to now better represent the price of buying physical billet and shipping it into warehouse, another source close the situation added.
This view is shared by other traders using the contract.
"I don't think what [the trader canceling warrants] has done is irresponsible: the movement of the contract into regions where there is no commercial billet trade diluted the LME cash price; weakening it and this has led to the situation this week," a third source said.
"Since the market moved away from Turkish and Black Sea markets to include warehouses where there is no major commercial trade such as the US and Western Europe, the differential between the LME cash price and the physical market widened to around $100/mt," the second source said. "Then somebody bought a lot of futures, sending the cash price up; this isn't helpful for the development of the contract though."
Interest in the contract from billet producers has been thin, and, after the illiquidity of the LME contract was exposed this week, it's unlikely to win any more favor among steel mills, the third source said.
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