Commodity Traders Face New Squeeze as Storage Congestion Spreads
Commodity traders are facing another supply squeeze as stockpiles concentrate in fewer cocoa depots, mirroring congestion at metals warehouses that means some buyers are paying record premiums for deliveries.
Warehouses in Antwerp, Belgium, held 61 percent of cocoa certified for delivery by the NYSE Liffe exchange on June 24, compared with 36 percent a year earlier, bourse data show. That mirrors the trend in metal stockpiles, with 73 percent of aluminum and 90 percent of copper tracked by the London Metal Exchange now held in three locations.
Reserves are concentrating in fewer places as depots offer incentives to attract supply. Arrivals exceed withdrawals, expanding stockpiles and allowing warehouse companies to profit from storage charges. While premiums for physical cocoa have yet to rise, surcharges for physical copper are in some cases the most in seven years and in aluminum the highest ever.
“They’ve seen this work in metals so all they’ve done is taken it across to agriculture,” said Colin Hamilton, the head of commodities research at Macquarie Group Ltd. in London. “You have so much material in a given location that it becomes essentially impossible to load that out to the extent that the market needs.”
Cocoa for delivery in September jumped 1.4 percent to 1,537 pounds ($2,319) a metric ton on NYSE Liffe in London today. Prices have dropped 3.8 percent in the past year.
Withdrawals in cocoa are mostly limited to 200 tons a day per warehouse, according to three people with direct knowledge of the deliveries, who asked not to be identified because the matter is private. A buyer taking 75,000 tons, the maximum allowed by NYSE Liffe, might wait about 18 months if the beans are in the same depot.
While most buyers get beans directly from producing countries, the stockpiles become more important when supply is disrupted. The main harvest in Ivory Coast, the biggest grower, usually begins in mid- to late-September. It may be delayed by a month this year because of the late development of pods, said Kevin Marcus, founder of Marcus Weather in Passaic, New Jersey.
Buyers probably won’t get “good-quality new-crop cocoa” until January, said Derek Chambers, the head of cocoa trading at Paris-based Sucres et Denrees SA. Concern is also mounting because some of the bags of cocoa stored in Antwerp were found to have wet stains last month.
Cocoa for delivery in September now trades near parity with the December contract on NYSE Liffe. When supply meets demand, prices for later deliveries are normally higher to reflect costs such as storage and insurance. The spread was at a discount of 12 pounds ($17.89) a ton as recently as July 1.
“The problem with Antwerp is that the market does not know if it is available at all because of the recent quality issues and the amount of time it takes to move beans out of warehouses,” Chambers said.
NYSE Liffe has no rules on how fast cocoa must be delivered. The bourse introduced minimum daily deliveries for coffee last year after customers including Armajaro Trading Group Ltd. in London complained. At the time, the exchange said the same would be done for cocoa “in due course.”
Some warehouse owners offered incentives including free transport from ships to depots to attract supply, according to six people with knowledge of the arrangements.
While the exchange has raised the issue of deliveries with the European Warehousekeepers Federation, it wasn’t discussed in depth, said Jack Steijn, secretary general of the Amsterdam-based industry group. Adaora Anunoby, a spokeswoman for NYSE Liffe, declined to comment.
The London Metal Exchange said July 1 it was considering rules to speed up withdrawals from metal depots where waiting times exceed 100 days. The warehouse companies also offered incentives to attract inventory, according to Societe Generale SA.
Surplus production and record-low interest rates combined to encourage financing deals in everything from aluminum to zinc. They typically involve the purchase of metal for nearby delivery and a forward sale to take advantage of a market in contango, where prices rise into the future. The transactions lock up metal in warehouses and make it unavailable to buyers.
Manufacturers get most metal from long-term contracts. They use LME-tracked stockpiles when they need extra supply.
The premium for physical copper in the U.S. jumped 33 percent to $176 a ton in the past year, according to Metal Bulletin data. The global supply surplus will expand fourfold this year, Barclays Plc estimates.
The surcharge for aluminum in the U.S. Midwest rose to an all-time high of 12 cents to 13 cents a pound, at a time when Morgan Stanley is predicting a seventh consecutive annual supply glut.
The premium for Ivorian cocoa in the physical market is 62 pounds a ton above futures, less than last year’s average of 69.53 pounds, according to data from KnowledgeCharts, a unit of Commodities Risk Analysis in Bethlehem, Pennsylvania.
While stockpiles certified for delivery by Liffe reached 92,020 tons on June 24, from 51,070 tons at the end of 2012, they are still below the five-year average of about 128,000 tons. NYSE Liffe will update the figures today.
IntercontinentalExchange Inc. (ICE), which agreed to acquire NYSE Euronext for $8.2 billion in December, introduced a rule in March that requires sellers to apply a discount that is the difference between withdrawing coffee in New York and five other ports. In Antwerp, which holds 63 percent of certified arabica stockpiles, the discount is the highest at $1.62 a bag. The change is meant to compensate buyers for the additional expense of moving beans out of more costly locations.
“If a warehouse keeper is not able to deal with the cocoa in reasonable commercial terms, then Liffe should not really have them as a registered stock-keeper,” said Jonathan Parkman, the co-head of agriculture at Marex Spectron Group, a London-based broker. “Should ICE acquire NYSE Liffe we can only hope they will do a better job of eradicating these practices.”
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