Longtime readers of MetalMiner may recall a number of aluminum posts we have put out over the years since the financial crisis that explore shadow stocks or the “stock and finance trade” inventory that have referred to the murky world of “off-warrant,” or non-exchange, reserves of aluminum. Those reserves are often hard to determine in terms of location, volume or ownership.
They have remained an enduring feature of the global aluminum market. The market’s perception of their size and the possibility of their delivery back into circulation have been persistent influences on the market price.
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Aluminum after the financial crisis
The stock grew in the immediate aftermath of the 2008 financial crisis, as the world went into a form of financial lockdown. All manner of downstream activities from automotive to household goods stopped consuming aluminum.
Recovery took many months, indeed stretched in 2010 before Chinese stimulus measures rippled out into the world, stimulating demand and facilitating a return to strong growth.
But primary aluminum mills — partially protected by power and alumina supply contracts linked to the ingot price and mindful of the huge cost to capital of shutting down major smelters — kept churning out the metal.
Stock and finance
Seeing an opportunity, traders and banks piled into the market.
They bought spot shipments of physical metal and sold it far forward at higher prices on the LME. As such, they locked in sufficient margin to finance and store the metal – hence, stock and finance.
Millions of tons of aluminum inventory built up in Detroit, New Orleans, Vlissingen, Rotterdam and elsewhere. In the short term, this saved aluminum producers from going bust and the market from an even more appalling price crash than it was already experiencing.
Since then, the size of those inventories — often much larger than the visible exchange-traded stocks on the LME and SHFE — has been a sobering reminder to the market that, should those stocks be released, the price could crash at any time.
As a result, aluminum has been persistently capped — hobbled, if you will — by the reminder that a short-term shortage could be reversed by large traders or financial institutions releasing metal onto the market without notice or prior approval. Arguably, as the intervening decade has shown, those parties managed the gradual release of their inventory quite responsibly.
However, we shouldn’t be naive enough to think they did that for altruistic reasons. They simply didn’t want a price crash any more than anyone else.
The aluminum market is now in deficit.
First, in the rest of the world outside China — and then China itself, for a number of reasons — have found primary production not meeting downstream demand
And, guess what: those stocks are running down.
In fact, a Bloomberg report suggests they have all but gone.
Apart from one huge 1.8-million-ton haul of Chinese aluminum held by Vietnamese authorities following a U.S.-led anti-dumping investigation in 2019, most has been consumed. The inventory had been in Malaysia’s Port Klang. However, it seems to have been shifted to Vietnam in an attempt to get around U.S. origin rules.
LME depots in Detroit and Vlissingen are now virtually empty, Bloomberg reports. Those held more than 3.5 million tons at the peak back in the last decade.
It’s a similar story in Rotterdam. The Dutch city used to hold millions of tons of metal in LME depots and private warehouses. Globally, the LME has a fraction of the inventory it once held.
But the situation is arguably most severe in China, the post suggests, where total inventories across the entire country now stand at about 1.2 million tons. That equates to roughly two weeks’ worth of demand.
A thing of the past
Bloomberg cited Trafigura, which indicated the decadelong glut of aluminum will soon be a thing of the past.
The post suggests that with demand rising and Chinese supply constrained, the risk over the medium term is to the upside as consumers fight for limited supply.
China has already become an importer this year, and not just because of power rationing. GDP growth in China is slowing. That could yet turn the tide on bets for higher prices in the medium term.
However, with power costs rising and environmental controls increasing, the days of plentiful, cheap aluminum may be over in the longer term.
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