LONDON — London Metal Exchange (LME) aluminum has this week hit its highest level since March 2019.
The three-month price is sitting just below Monday’s high print of $1,935 at a current $1,925 per tonne.
Which is not bad for a market that is widely believed to be heading for its largest supply surplus since the global financial crisis of 2009.
Research house CRU is forecasting a global surplus of 3.2 million tonnes this year. Most of it, 2.9 million tonnes, will build outside of China.
Yet all this unsold lock-down metal is conspicuous by its absence.
LME stocks have actually fallen by 53,000 tonnes so far this year. By this time in 2009, the depths of the last aluminum demand crisis, LME stocks had surged by 2.2 million tonnes.
Where’s the aluminum?
A FAST BOAT TO CHINA
Some of it has gone to China.
China has imported 766,000 tonnes of primary aluminum so far this year, an inversion of the country’s normal trade patterns that was last seen in 2009.
Then, as now, a super-charged post-crisis recovery in China and a lagging revival in the rest of the world caused Shanghai Futures Exchange (ShFE) prices to outperform London, opening an import-positive arbitrage window.
The Shanghai market continues to pull the LME along in its bullish wake amid signs of physical tightness in parts of the domestic market, particularly for primary aluminum, the form of the metal that is traded on both London and Shanghai exchanges.
Import flows are expected to continue a while yet but are still running well below those in 2009, when they totalled 1.5 million tonnes.
Allowing China’s imports still leaves a lot of metal missing.
But it is there, just not in clear statistical daylight.
The hidden build in inventory can be partially discerned from the LME’s new “off-warrant” stocks report, a monthly count of what the exchange terms “shadow” stocks.
The reports cover metal that is being stored in or near exchange-registered sheds under contracts explicitly referencing the option of delivery to the LME.
This metal is ready and primed to be warranted if necessary, at which stage it shows up in the LME’s daily stocks report.
In the case of aluminum, this shadow inventory is the source of the mass warranting events that characterize the LME contract, such as last month’s four-day burst of 93,000 tonnes.
It’s also the destination for much of the metal that “leaves” LME stocks. It is only “leaving” as far as the next cheaper warehousing rental deal in the same location.
This circular flow of metal dulls any LME stocks price signaling power, which is one of the reasons the exchange started publishing its “off-warrant” stocks figures in February.
And it’s in these shadows that the aluminum surplus has been accumulating.
Off-warrant inventory increased by almost 730,000 tonnes in February to 1.56 million tonnes in September. Indeed, shadow stocks at the end of that month were larger than exchange-registered stocks of 1.45 million tonnes.
Most of the build has come at locations such as Port Klang and Johor in Malaysia, Kaohsiung in Taiwan and Gwangyang in South Korea.
Asia is becoming the trade’s favorite new aluminum storage hub. It’s relatively cheap, and it’s close to China in the event of more import opportunities.
The largest accumulation outside of Asia has been at Detroit, where “official” LME stocks are zero. Shadow stocks rose by 99,000 tonnes to 166,000 tonnes between February and September.
That’s a far cry from 2009, however, when LME warehouses in Motown received 630,500 tonnes of surplus aluminum.
NO CREDIT CRISIS
The change in Detroit stocks patterns highlights an important difference between past and present crises.
Aluminum demand has experienced the same catastrophic downturn, but there has been no credit squeeze in 2020.
The metals slump of 2009 was caused by and defined by the collapse in credit markets triggered by the implosion of sub-prime mortgage instruments.
As the stricken banking sector slashed credit exposure, the aluminum supply chain’s ability to finance inventory shrank.
Producers, consumers and merchants had no choice but to liquidate stocks on the LME, which lived up to its “market of last resort” reputation.
This time around, notwithstanding some exits from the commodities financing space, credit lines are evidently strong enough for the aluminum supply chain to hold higher inventory, be it in LME shadow storage or totally away from prying eyes in private storage.
October’s deliveries of metal onto LME warrant were not a sign of stocks-financier desperation, but rather part of the contract’s normal finely-tuned interplay between time-spreads and rental costs.
OUT OF SIGHT, OUT OF MIND
As long as credit markets remain robust, this year’s surplus aluminum is going to stay in strong hands.
This is important for market optics.
CRU’s head of aluminum research, Eoin Dinsmore, posed the question at the LME Week Virtual Seminar as to whether the surplus matters if the market can’t see it.
Its shadowy existence is likely to exert less influence on outright prices than the highly visible surge in inventory during the last crisis.
What the market can see is time-spread tightness in Shanghai amid low exchange stocks and falling social stocks of primary aluminum.
These seem to be true signals of the tightness that has galvanized the ShFE contract, which continues to outstrip London, hitting a three-year high today.
If the current squeeze feeds through to continued imports, aluminum’s outlook will look even rosier.
Just as long as the mountain of aluminum outside of China stays in the shadows.