Column: LME stock surge fails to cool hot aluminum market: Andy Home

A worker uses a loader to move 10.2 meter aluminum ingots weighing 28 tons (61,729 pounds) at the foundry shop of the Rusal Krasnoyarsk aluminum smelter in the Siberian city of Krasnoyarsk, Russia, on November 9, 2017. REUTERS/Ilya Naymushin/File Photo

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LONDON, Feb 10 (Reuters) – London aluminum hit a fresh 13-year high of $3,333 a tonne on Thursday morning, the latest step towards its all-time high of $3,375 dating back to July 2008.

London Metal Exchange (LME) three-month aluminum is up 15% from the start of 2022, making it the star of a bullish base metal pack.

The rally is fueled by supply fears. Energy constraints are holding back production in China and Europe. The West’s standoff with Russia over Ukraine has raised the specter of sanctions against one of the world’s largest light metal suppliers.

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One would have expected Thursday’s LME inventory report showing a 119,000 tonne jump in FX stocks to quell the bullish flames in the market.

However, aluminum just shrugged it off, last trading at $3,270 a ton. Indeed, the arrival of “only” around 125,000 tonnes into the LME system serves to reinforce the bullish narrative of a tectonic shift from an aluminum surplus to a deficit.

LME’s total aluminum inventory decreased by 1.6 million tonnes in the first 11 months of 2022

DECREASE IN STOCK SHOCKS

The delivery of 126,375 tons of aluminum on LME mandate could seem a curious manifestation of the market deficit.

But the London aluminum market has grown accustomed to such stock market shocks, which capture the metal’s rotation between in- and out-of-mandate storage, a pendulum driven by warehousing as much as aluminum dynamics.

Storage costs have been a defining feature of the aluminum market since the fury of LME warehouse loading queues at the start of the last decade. It’s because there have been so many things around.

The demand shock that followed the 2008-2009 financial crisis pushed global stocks to several million tonnes.

LME recorded stocks are just the tip of this aluminum mountain. LME phantom stocks – those stored off-market but with the contractual option of exchange delivery – have at times matched or even exceeded warrant stocks over the past couple of years. Much more metal remained in private storage away from statistical light.

Massive turnovers of this aluminum inventory have become the norm, especially when LME time spreads tighten.

With the LME’s cash premium hitting a two-year high of $40 a tonne on Monday, some form of stock reaction was inevitable.

But volumes so far have been light by aluminum standards. Even if more metals appear in the coming days, the inflows are unlikely to match those seen in March last year, when 653,000 tonnes were dumped into the LME system in just two days.

Stock market shocks are losing intensity.

This is because LME shadow stocks have been drawn down even faster than stocks recorded last year. By the end of November they had fallen from 1.12 million tonnes to just 447,000 tonnes, a much smaller pool of cash for quick LME collateral.

The inference is that private stocks have also shrunk to fill a growing supply and demand gap.

There are as many total inventory estimates – both visible and non-visible – as there are analysts, but everyone agrees that’s a lot less than there is. a year.

LOCATION, LOCATION, LOCATION

Most of the LME’s shadow stocks were located in Singapore and Port Klang in Malaysia at the end of November, so it’s no surprise that this week’s surge in recorded stocks is coming to the same two locations.

This is also a problem for the aluminum market.

China’s production cuts have reinforced the country’s shift to being a net importer of raw primary aluminum such as that stored in LME warehouses.

The resulting arbitrage opportunities acted as a gravitational pull on stocks easily accessible to LME locations in Asia.

The European and American sites currently hold only 3% and 2% of the total tonnage registered at the LME respectively.

This low inventory coverage has left both regions highly exposed to the current loss of production in Europe due to an ongoing energy crisis. Energy-intensive foundries have collectively reduced their annual production capacity by up to 800,000 tons.

The impact on the supply chain is evident in record physical premiums beyond the near-record LME price in the US and Europe.

Asian premiums, on the other hand, are collapsing and this week’s warrants in Singapore and Port Klang only underscore the lopsided nature of global equity distribution at the moment.

BACK IN THE HISTORY OF ALUMINUM

It’s hard to overstate the significance of this turnaround for the aluminum market, which has been defined by too much supply and too much inventory for many years.

But output growth has stalled in China, the world’s largest producer, as aluminum smelters fall victim to energy efficiency targets.

The country imported 2.6 million tons of primary aluminum in 2020 and 2021, taking a big chunk of western stocks. This in turn resulted in an increased call for the metal stored at the LME.

It is not known how much aluminum there is in total and by how much it has decreased.

But the LME price and physical premiums clearly indicate that total inventory has fallen sharply, especially outside of Asia.

The LME arrivals in Thursday’s inventory report may look impressive, but they are not enough to change the big picture of declining inventory coverage at a time when supply is tight.

The opinions expressed here are those of the author, columnist for Reuters.

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Written by Andy Home; Editing by Susan Fenton

Our standards: The Thomson Reuters Trust Principles.

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