Aluminum and the LME: A Love (or Hate) Story? – Part One

How did we ever get into this situation? We seem to accept the state of the aluminum market, and in particular the inventory financing and storage of the metal on the LME, as a perfectly normal state of affairs, but step back a moment and take another look.

As a recent MB article reproduced in World Aluminum reported, more than 80 percent of LME warehousing is now in the hands of banks or traders — the same banks and traders that actively trade the forward price curve by buying spot and forward-selling up to 15 months, locking away millions of tons of metal in financing deals.

In 2010, JP Morgan purchased Henry Bath, Trafigura purchased NEMS, Glencore purchased Pacorini, and Goldman Sachs purchased Metro International. So lucrative is playing both sides of this coin – both the profit earned from the forward curve and the profit earned from providing the warehousing — that Glencore’s Pacorini warehousing subsidiary alone added 12 of the 14 new sheds being added in Vlissingen, Netherlands, since the start of 2011, according to this Reuters article.

JP Morgan is said to have canceled 500,000 tons of aluminum in just two days during December to move it from Parcorini’s Vlissingen warehouses to their own Henry Bath warehouses in Rotterdam – 25,000 x 20-ton truckloads of metal shunted from one set of warehouses to another – what does that tell you about the profits being made?

Of course, a breakout of company profits from warehousing is pretty hard to get, but Glencore’s Pacorini is said to have made $31 million in profit in 2010 around the time Glencore bought them; since then, many new sheds have been added.

While the big boys are playing games soaking up the world’s excess metal, consider the small- to medium-sized player.

If you look to take metal from the LME for consumption next month, forget it. For some bizarre reason, while warehouses can take in metal at the rate of tens of thousands of tons per day if they so choose, they are not obliged to release metal at more than 3,000 tons per day — and even then, only for locations storing more than 900,000 tons.

So you could be waiting up to six months for your metal, being charged storage all the while, having to finance the stock and insure it.

Continued in Part Two.

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