LME aluminum inventories have been skyrocketing in recent days, leading some to speculate that falling demand is creating a massive surplus. They may be right; even Andy Home, Reuters columnist and usually a good interpreter of the workings of the LME and related physical trading, wrote an article this week seeking to explore the possible causes.
Firstly, what has been happening? Almost 300,000 metric tons of aluminum have been delivered into the London Metal Exchange warehousing system in the past four days. Registered tonnage is now at an all-time high of 4,826,275 metric tons, with more expected.
Detroit, always a key player in the LME aluminum financing game, was the main recipient of new material, receiving 100,000 tons of metal on Monday. It now holds 1,264,775 tons of aluminum, the largest concentration in the LME system.
Another location, however, is catching up fast. Vlissingen has seen almost 195,000 tons of metal delivered over the last couple of days, lifting total registered tonnage at the Dutch location to 907,700 tons.
Why these locations? In LME terms, Vlissingen is Glencore, the only registered warehouse company is Pacorini, owned by the Swiss trading giant. Detroit, on the other hand, has three firms: Goldman Sachs, Glencore and Noble Group. Goldman’s Metro is still the dominant warehouse operator in the city with 29 registered facilities. Pacorini has two, and Worldwide Warehouse Solutions, owned by Noble, has three.
So is this metal that was previously held off-warrant being bought into the system, or is it new metal direct from smelters? Here, we are not so sure. Reuters reports that European aluminum orders plunged 20 percent year-on-year in October, according to researchers at Barclays Capital, as the financial crunch feeds through to a real-economy crunch.
Meanwhile, Japanese buyers have achieved a 5 percent drop in physical premiums for first quarter 2012 shipments because of weakening local and regional demand. On the face of it, this suggests it is merely excess material finding a home as physical demand weakens, but another trend is also at play.
Continued in Part Two.