LONDON When the London Metal Exchange (LME) consulted with its industrial users on what it should do about long load-out queues at some of its warehouses, the only point of general agreement in a polarized response was that it should improve transparency.
Producers, consumers and industry groups were united in their call for the exchange to issue more information about who is doing what on the LME, something equivalent to the long-established Commitment of Traders Report (COTR) covering U.S. exchange trading.
All share the same profound suspicion that what was intended as a price discovery forum for industrial users had been hijacked by financial players.
To quote U.S. aluminum producer Alcoa, vehemently opposed to the LME's proposal for forcing down the queues, reports along the lines of the COTR "would help to clarify for market participants the impact and relative influence financial investors have on the price discovery process."
Well, the LME has now delivered. Indeed, it has sprung something of a surprise by going beyond the weekly reporting format used in the U.S. to provide daily reports, albeit released weekly and with the customary two-day time-lag that characterizes its existing dominant position reports.
So, how to interpret this new flow of information, now in its second week?
Cautiously would probably be the best word. There are several important caveats, some generic, some specific to the way the LME trades.
But parts of the reports look genuinely useful and if you're in the business of LME trading, you're going to be seeing a lot more commentary and analysis based on them going forwards.
WHAT YOU DON'T GET TO SEE
What the reports won't show you is the positioning of major metals market players such as Glencore and Trafigura.
Such is their scope of operations, pigeon-holing such companies into one of the four main categories used in the report is tricky.
"Producer/Merchant/Processor/User" would seem the obvious choice. Until, that is, you remember Trafigura also holds within its group structure an asset management arm, Galena, which should logically appear under "Money Manager".
Maybe "Other Reportable" then, a category for those that aren't so easily defined?
Or are they submerged in the fourth, largest open interest category, "Broker Dealer/Index Trader" (BDIT)?
Classification is a problem with all such positioning reports and it's one that is accentuated by the nature of the LME market.
That BDIT category, for example, hides more than it reveals. Self-evidently that is where investment money tracking both the big commodity indices such as the S&P GCSI and the multitude of replicant indices lies.
But there is much more in there than just index money. That's evident in some of the LME's smaller contracts such as aluminum alloy. As of Aug. 8 the BDIT category accounted for 76 percent of total open interest on both the long and the short sides of the alloy contract, even though there's no index in the world that would include something as niche as alloy in its weightings.
Rather, the dominance of BDIT open interest across all the LME contracts reflects the unique nature of the LME market, which funnels over-the-counter (OTC) order flows into risk management positions on the exchange.
Many larger players in the market, particularly industrial users, are happy to contract directly with their broker-banks and leave it up to them how they want to net off the resulting exposure on the LME.
The original orders exist as bilateral OTC contracts, which exist outside the scope of the exchange's positioning reports, based as they are on clearly defined customer accounts.
The BDIT reporting segment, therefore, is the least easily defined, likely encompassing the whole spectrum of LME participants.
WHAT YOU DO GET TO SEE
But that still leaves the "Money Managers" category as a useful, if incomplete, insight into investment money positioning.
Right now, money managers are net long of all the main LME contracts, as shown in this graphic.
Over the two weeks running from July 28 through Aug. 8 that net long has been smallest in the case of copper, reflecting the lack of investment commitment in a market that, up until today, had been confined in a tight $6,950-7,200 range.
Money managers' largest net long position over the same period has been in zinc, coinciding with that metal's strong rally to a three-high year of $2,404.50 at the end of July.
Interestingly, the same two metals saw the largest change in net length over the last reported week, that in copper tumbling by 11,335 lots and that in zinc by 10,751 lots.
In both cases the reduction has been closely correlated with price action, copper falling hard on Aug. 5 and Aug. 6 and zinc harder over the second half of last week.
The relationship between managed money positioning and price in the other metals is less clear-cut, not least because the others haven't registered much in the way of directional price action since the LME started releasing the data.
It's still early days, of course, with only 10 data points so far. Analysts will want to work with a deeper history to see how managed money positioning and price relationships develop as well as how LME open interest changes with the passage of the exchange's high-liquidity third-Wednesday monthly prompts.
But at least they now have something granular to work with and for that the LME should be commended.
Whether it will receive the same praise from the industrial players who asked for the information in the first place remains to be seen.
After all, if aluminum producers such as Alcoa and Rusal were hoping that the reports would show speculators depressing the price of their product, they will be disappointed.
Money mangers hold a net long position in aluminum equivalent to 12.3 percent of open interest. Those much-maligned speculators, it seems, are doing their fare share of sustaining the price at a level where aluminum producers are largely back in the black.
(Editing by William Hardy)