US LME Aluminum Inventory Falling, But Market Is Far From Fixed

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LME-registered aluminum stocks in the United States are falling apparently, down 6% so far this year to around 1.8 million metric tons, according to Reuters, the lowest since July 2009.

This is all the more remarkable as global inventories have risen to new records with the market still in massive surplus.

Inventory in the US had fallen by as much as 13% through mid-November, the paper noted, but recovered slightly in recent weeks. About one-third of the 5.5 million metric tons in the LME system is now stored in the United States, the smallest share since before the world economic crisis hit five years ago:

US-LME-aluminum-stocks

Source: Reuters

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But before we think falling LME inventory is a sign that the LME’s rule changes have solved the problem of metal hoarding in US warehouses, we need to see where that metal is going – when it is finally loaded out, which in some cases won’t be for a year or more.

Contrary to speculation that a stronger US economy and improved auto manufacturing are responsible, reasons put forward in the article, it is much more likely the metal is simply destined for off-market storage; rents are lower, but more importantly, metal is more readily accessible if regulators decide to clamp down even more on the physical storage of the metal, or there is a collapse in physical delivery premia down the line.

The article notes that during the economic crisis, most of the metal landed in Detroit, still the US auto hub. Stocks there remain high, reaching a record of almost 1.6 million tons last week, but most of it is cancelled, meaning it is waiting to be delivered out some time during 2014. Although at its peak in 2011, U.S. aluminum accounted for more than half of the LME total, some 40% is now stored in Vlissingen in the Netherlands where Glencore’s subsidiary Pacorini has a network of 40 warehouses.

With a strong contango (premium for forward-dated metal over spot) and cheap financing, the cash and carry trade in aluminum has never been more profitable. Warehouse rents off market are said by Reuters to be up to 80% lower than charged by the LME-approved operators. Physical premiums in the US have eased a little since the LME rule changes, down from about $250/ton to $200/ton, but are still historically high.

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What This Means for Aluminum Buyers

The article says off-warrant metal is easier to come by, but although warehouse operators have reduced the incentives they are prepared to pay, the market is far from “fixed.” Indeed, it is still sorely distorted and will remain so while the cash and carry trade persists and long queues have not been cleared.

The best that can be said? At least for US consumers, the market is moving slowly in the right direction – or it is for now.

Read more from Stuart Burns.

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