Glencore, Goldman Sachs Aluminum Warehouses Still in Crossfire

Aluminum consumers are asking, “if the market has 5-10 million tons of inventory and we are told it’s in surplus, why are raw material costs rising? What is happening to drive competition for metal to such levels that physical spot premiums are rising so strongly?” We began laying out our case on this issue in Part One here.

Reuters seeks to address the above questions by saying the LME price is depressed by the overhang of inventory; with millions of tons locked up in the LME system and load-out rates masking metal essentially unavailable for months, if not years, no one is going to bid up LME metal.

At the large LME warehouses in Detroit, most of which are owned by a Goldman Sachs subsidiary, Metro, it can take 570 days for metal to be released, and at the Vlissingen warehouses in the Netherlands, owned by Glencore Xstrata subsidiary Pacorini, load-out rates now run to 555 days, the FT reports. Spot physical metal, however, is clearly becoming constrained, the degree of tightness reflected in rising premiums.

It would seem this is coming from a combination of demand from stock and finance deals, smelter closures and, Novelis suggests, a conscious decision by smelters to hold metal back from the market. That is controversial stuff, and they may be called upon to prove it, but if true, could explain why premiums have risen so sharply in recent months when smelter closures have been modest.

Others point to the significant closure of Ormet’s Hannibal smelter as the turning point and at 270,000 tons per year, that was certainly a significant change in the US supply market in Q4. But the fact remains that if demand is truly constrained (either by demand exceeding supply or by an orchestrated squeeze) why is the LME price not responding?

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The only answer can be that the LME has ceased to be a market for aluminum producers or consumers; that it is now almost solely a market for financial players – for Wall Street, if you will.

A producer may look to sell metal to a financial investor, who in turn uses the LME market to hedge, but consumers do not buy forward on the LME to access supply. Even so, they do use the forward market to hedge price risk, at least the LME-related portion of the price, but clearly this “demand” is not sufficient to move prices higher as ultimately every buy is closed out by a sell when the physical delivery happens in the real world.

Some parties are still expecting the physical premiums to fall when the new LME load-out rate rules come into play in April; personally, we can’t see that happening. It will take years to work those load-out queues down to a level where the LME has relevance for consumers again.

In the meantime, premiums look set to stay and interest will grow in Novelis’ assertions that we are seeing an orchestrated squeeze rather than simply a market reaction to tightening supply.

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  • The LME/premium situation seems realistic; no need for squeeze theories. Financial buyers are buying the metal, storing it in both LME and non-LME warehouses, and hedging on the LME. So the LME gets the brunt of the financial selling, but the physical market has its supply locked up and hedged. So premia go up.
    At some point, the Wall Street types who store in non-LME warehouses are going to want to take advantage of the premia and sell their physical metal. At that point we may get the mother of all short squeezes on the LME.


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