Things get ugly behind the commodity curtain

In today’s Money Morning…from bad to worse…the rot is spreading…we need an alternative, and we need it soon…and more…

On Monday, Ryan Dinse told you about the approaching “Berlin Wall moment”.

It was a warning for any investor to open their eyes to the creeping destruction of the free market.

If you haven’t already read it, do yourself a favor and check it out here.

Because what Ryan has to say is very important. The distortions of the recent LME nickel price fiasco are just the latest market injustice in a long line of examples dating back to 2008.

Hell, there are plenty of examples before the GFC as well, they were just a lot easier to cover up without the power of the internet. The point is, you and I are relegated to always being second-class citizens in this matter.

There is no bailout for the retail investor.

It is a privilege reserved only for a privileged few. And when they make a bad bet, like “Big Shot”, we lose.

As Ryan suggests, it is this moral decay that is fueling the downfall of mainstream finance – a catalyst that could end up tearing down centralized financial markets the way the Berlin Wall was torn down after the collapse of the Soviet Union.

At least we hope it will just be demolished…

Because right now I’m more worried about an explosion that could lead to a lot more collateral damage.

Worse and worse

My concern is that this grandiose nickel story is more than just an outlier.

Because once you start digging into this story a bit more, things get more disturbing. And while power players like Big Shot may have JPMorgan to cover their backs, middlemen aren’t always so lucky…

You see, what some people don’t realize about the commodities sector is that it is highly dependent on physical traders. These are companies that manage the actual movement of materials between buyers and sellers.

Glencore is perhaps the best known example you have heard of. But there are a lot more big names in this space – companies that are heavily involved in the same kind of market coverage as Big Shot.

Trafigura, for example, which had sales of $231 billion last year, is another major commodity trader. And if it has taken advantage of the boom in these physical materials, its financial director – Christophe Salmon – has some concerns:

We are already in a vicious circle in the futures market. I want to emphasize the impact this will have on the physical market.

We are increasingly engaging with governments to inform governments of the likelihood of market disruptions, i.e. stock-outs of certain products in certain regions.

What it suggests is that the cost of commodity trading could put additional pressure on already tight prices – a situation that could lead to undersupply of key energy commodities in regions like Europe. ..

However, Salmon’s comments don’t even begin to cover the seriousness of this case.

It’s not just the case of a few traders who land on the wrong side of a short press.

No, we are talking about the potential for a total liquidity crisis.

On March 8, a consortium known as the European Federation of Energy Traders (EFET) launched what can only be described as a plea for help.

In reality, EFET is a pressure group that represents the interests of companies like Trafigura, among others. And while lobbying efforts are infamous for blowing issues out of proportion, the tone of this announcement was desperate.

Here are some excerpts to give you an idea of ​​what I mean (emphasis added):

Under normal market circumstances, these energy market participants generally do not face such significant liquidity risks when hedging their business risks and therefore these companies remain solvent in the usual volatile commodity markets. raw.

However, market participants, clearing members and clearing houses are currently facing major challenges in managing the impact of the current geopolitical situation. Massive price movements in European energy markets have resulted in a massive increase in margin requirements for market participants.

Since the end of February 2022, an already difficult situation has worsened and more and more energy market participants find themselves in a position where their ability to find additional liquidity is greatly reduced or, in some cases, exhausted. . There is therefore a significant risk that some companies will not be able to meet the additional margin calls issued by their clearing bank, even if they have to continue to hedge their physical assets to avoid exposure to market price risks. Marlet.

Initial Margin (collateral) requirements have increased approximately 6x in the last 4-6 months. Market volatility has resulted in a 10-fold increase in the average amount of variation margin required from one business day to the next.

To illustrate: price levels, for example, for Dutch TTF gas in the first month rose from EUR 23/MWh (July 2, 2021) to EUR 75 (January 7, 2022) and exceeded EUR 300 in March 2022. A producer of energy which covers large volumes of gas and electricity via stock exchanges was to pay an initial margin of €1 billion in the summer of 2021, saw its margin requirements increase to €4 billion in October 2021 and finally to €6 billion in March 2022 — a multiplication by six without modification of the hedged position.

The same company that normally expects to experience daily margin cash flows from price movements of around 50 million euros, is now facing variation margin requirements of up to €500 million in one business day due to to extreme price volatility.

The same situation will occur once energy prices fall again, because then market participants supplying electricity and gas to consumers will suffer from the same shortage of liquidity that energy producers are currently experiencing.

The conclusion drawn from all this calamity discussed by EFET is a need for a bailout.

They want central banks to help cover the growing cost and risk of these efforts. A justification which, according to them, will help restore confidence in the market.

In other words, they want everyone else to foot the bill for their greedy bets.

As for the implications this will have for investors, it is far too early to tell. But if things aren’t resolved soon and these EFET members don’t get the bailout they’re hoping for, don’t be shocked if we see serious trouble in the market.

All of this suggests that the “wall” could come down much faster than expected.

That’s why, if you’re as fed up with this market perversity as we are, it’s time to consider alternatives. As Ryan Dinse will tell you, Bitcoin [BTC] and cryptocurrency is a way forward.

It’s an alternative that’s by no means perfect, but it’s far better than the mess we have now. You can find out more about why and how you can get involved here.

Because whatever the outcome, it’s clear that the current dynamics of shady modern markets simply aren’t sustainable.

We need an alternative, and we need it soon.


Ryan Clarkson-Ledward,
Editor, silver morning

Ryan is also the editor of Australian Small Cap Investigator, an equity newsletter that tracks promising small-cap stocks. To find out how to subscribe and see what Ryan is saying to subscribers right now, Click here.

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