We’ve reported on Alcoa‘s production declines affecting aluminum prices and physical premiums, but there is even more to look at for those investing in firms like Alcoa, Rio Tinto Group and Norsk Hydro – notably, the London Metal Exchange‘s aluminum inventories.
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In short, LME’s aluminum inventory has been steadily dropping after reaching about 5.5 million metric tons in mid 2013. According to Market Realist, that drop was compounded in October with aluminum inventory at LME warehouses down 138,900 mt.
As of this week, LME warehouses recorded a total aluminum inventory of 3.03 mmt, according to the news source, of which nearly 36% is from canceled warrants. All the metal that enters LME warehouses is on warrant and these warrants are canceled when the bearer requests the physical delivery of the metal.
From late October through Nov. 2, canceled warrants grew by more than 23% despite total aluminum inventory with LME warehouses decreasing over the same period.
Leon Westgate, an analyst at ICBC Standard Bank, told Bloomberg: “(The increase in canceled warrants is) unlikely to be related to real demand. With the large tonnages like that, it’s likely to be finance-related. It’s likely to be material moving to an ex-LME location.”
Forming your aluminum sourcing strategy, moving forward
Alcoa’s cuts and the situation with LME warehouses could impact midwest aluminum premiums, but they won’t likely have a long-term impact on aluminum prices due in part to a strong dollar and the significant amount of aluminum leaving China.
How will base metals fare for the remainder of 2015 and into 2016? You can find a more in-depth aluminum price forecast and outlook in our brand new Monthly Metal Buying Outlook report. For a short- and long-term buying strategy with specific price thresholds: