Hedged Repos
๐จ.๐ฆ. ๐ง๐ฎ๐ฟ๐ถ๐ณ๐ณ๐ ๐๐ฟ๐ฒ ๐ฃ๐๐๐ต๐ถ๐ป๐ด ๐ ๐ฒ๐๐ฎ๐น ๐ฃ๐ฟ๐ฒ๐บ๐ถ๐๐บ๐ ๐๐ถ๐ด๐ต๐ฒ๐ฟโ๐๐ผ๐ ๐๐ฎ๐ป ๐๐ผ๐ป๐๐๐บ๐ฒ๐ฟ๐ ๐ฎ๐ป๐ฑ ๐๐ฎ๐ป๐ธ๐ ๐ฅ๐ฒ๐๐ฝ๐ผ๐ป๐ฑ?
The U.S. 25% tariffs on Mexico and Canada have driven costs for imported metals sharply higher. Take zincโbefore tariffs, premiums were ~$320/mt. Now, with a $2800/mt zinc price, tariffs add $700/mt in costs on roughly ๐ฒ๐ฌ๐ฌ,๐ฌ๐ฌ๐ฌ๐ ๐ง of annual imports.
๐๐ผ๐ป๐๐๐บ๐ฒ๐ฟ ๐๐ถ๐น๐ฒ๐บ๐บ๐ฎ: ๐๐๐ ๐ก๐ผ๐ ๐ผ๐ฟ ๐๐ผ๐น๐ฑ ๐ข๐ณ๐ณ?
Youโd expect consumers locked in at annual premiums around $286/mt to stock up before premiums rise further. Instead, uncertainty around consumer sentiment is driving them to curtail purchases, avoiding excess inventory on their balance sheets.
๐๐ฒ๐ฑ๐ด๐ฒ๐ฑ ๐ฅ๐ฒ๐ฝ๐ผ๐: ๐ ๐ฆ๐บ๐ฎ๐ฟ๐ ๐๐น๐๐ฒ๐ฟ๐ป๐ฎ๐๐ถ๐๐ฒ
Instead of carrying excess stock, consumers can turn to hedged repos:
โ ๐ฆ๐ฒ๐น๐น ๐บ๐ฒ๐๐ฎ๐น ๐๐ผ ๐ฎ ๐ฏ๐ฎ๐ป๐ธ โ removes inventory from the balance sheet.
โ ๐ฅ๐ฒ๐ฝ๐๐ฟ๐ฐ๐ต๐ฎ๐๐ฒ ๐น๐ฎ๐๐ฒ๐ฟ ๐ฎ๐ ๐๐ต๐ฒ ๐๐ฎ๐บ๐ฒ ๐ฝ๐ฟ๐ฒ๐บ๐ถ๐๐บ โ avoiding exposure to higher future costs.
โ ๐ข๐ฝ๐๐ถ๐บ๐ถ๐๐ฒ๐ ๐ฐ๐ฎ๐๐ต ๐ณ๐น๐ผ๐ while keeping supply security.
๐ช๐ต๐ ๐๐ฎ๐ป๐ธ๐ ๐ฆ๐ต๐ผ๐๐น๐ฑ ๐๐ฒ ๐๐น๐น ๐ข๐๐ฒ๐ฟ ๐ง๐ต๐ถ๐
Banks benefit from hedged repos too:
โ
๐ก๐ฒ๐ฎ๐ฟ-๐๐ฒ๐ฟ๐ผ ๐ฟ๐ถ๐๐ธโthe metal is sold to them, not just used as collateral.
โ
๐๐ฒ๐ฑ๐ด๐ฒ๐ฑ ๐๐ถ๐๐ต ๐ฎ๐ป ๐๐ ๐ ๐๐ต๐ผ๐ฟ๐ ๐ฝ๐ผ๐๐ถ๐๐ถ๐ผ๐ปโprotection against price swings as well as an option to deliver material (if LME branded)
โ
๐ฃ๐ฟ๐ผ๐ณ๐ถ๐๐ฎ๐ฏ๐น๐ฒ ๐๐ผ๐ฟ๐๐-๐ฐ๐ฎ๐๐ฒ ๐๐ฐ๐ฒ๐ป๐ฎ๐ฟ๐ถ๐ผ should consumer defaultโowning SHG zinc at $0/mt premium in a high-premium market.
๐ ๐ช๐ถ๐ป-๐ช๐ถ๐ป ๐ข๐ฝ๐ฝ๐ผ๐ฟ๐๐๐ป๐ถ๐๐
Banks should be actively reaching out to major U.S. metal consumers to discuss flexible purchasing options. Giving consumers the ability to declare the max volume on their purchases at the lower premiumโwithout holding inventoryโcould be a mutually beneficial strategy.
