London 24/03/2015 - Hong-Kong based trader Noble - rather than the usual suspects - is behind the massive lead stock cancellations of nearly 100,000 tonnes that took everyone by surprise this week, according to speculation swirling around the LME metals market on Tuesday.
This hypothesis, which also involves a warehouse deal with Metro and stock migration to South Korea, is backed up by multiple trade and warehouse sources. Indeed, those who were quick to point the finger at Glencore and Trafigura on Monday switched to Noble on Tuesday.
Noble declined to comment and Metro was not immediately available.
On Monday, a substantial increase in LME cancelled warrants - or metal booked for removal - across most delivery points took the market by surprise. Fresh cancellations jumped by 98,350 tonnes to 109,100 tonnes while limiting available lead to just 128,950 tonnes, the lowest level since October 2009.
This caused LME prices for three-month delivery to spike to $1,850 per tonne from a near five-year low of $1,677 last week.
Shipping instructions have already been given to the affected warehouses, confirming Noble's intention to move the metal physically, FastMarkets understands.
Most of the metal is heading to South Korea where Metro, which was acquired by the Reuben Brothers in the last quarter of 2014, has reportedly offered an attractive warehouse deal to take on the stocks.
"Noble has taken all the lead in Europe to move it to South Korea," a well-informed source said. "They have a deal with Metro - they are not moving the metal to WWS [Worldwide Warehouse Solutions, which they own]."
The theory is that Noble borrowed the LME lead spreads some months ago when these were showing a contango to build a large position - one dominant holder was holding between 80 and 90 percent of all cash and Tom positions last Wednesday, which was the February prompt date.
The nearby spreads, which had started to tighten in recent weeks, moved into backwardation this week. The cash-to-three-months spread closed at $10.25 on Monday, the widest since 2012, and was recently just below $10.
In addition to a warehouse deal that may have included a cash incentive per tonne and/or a reimbursement of the LME free-on-truck (FOT) charges that must be paid when taking delivery of LME metal, Noble also benefited from cheap freight rates from Europe to South Korea, market sources pointed out.
Once the lead stocks reach South Korea, they will be rewarranted onto the LME, two well-informed sources said.
"There is no need for that lead in Korea - they buy scrap and they have a major producer located there. So the idea is that the metal can be put back onto the LME and sit there for a while," another source said.
"There is no need for such material in the physical market despite a shortage of battery scrap," an Asian trader also said.
LME stocks are mainly composed of 99.97-percent purity lead rather than 99.99-percent and include brands that are not very popular in the market, sources said without being more specific.
Many market participants had first guessed that the stocks would be kept off-warrant in South Korea where they would be subject to lower daily rent and to avoid falling under stricter LME rules on deliveries, which would have seen a significant part of LME stocks disappear from the system.
But Noble is reportedly planning to rewarrant the stocks in a repeat of 2012 when European lead stocks in Italy and Spain were moved to Antwerp.
Warehouse companies have been facing investigations and a tightening of regulations in recent months; some have already called for the LME to investigate formally this latest warehouse deal to see if any rules were breached although one market observer said that the deal was above board and commended Noble and Metro for their cleverness.
(Editing by Mark Shaw)