Column: Demise of LME fictitious stocks adds to metals market turmoil: Andy Home
LONDON, April 13 (Reuters) – The total amount of metal registered in the London Metal Exchange’s (LME) global warehouse network fell below 1 million tonnes in March.
Market stocks of aluminium, copper, lead, nickel, tin and zinc have not been so low since the last century.
The visible sell-off was accompanied by an even bigger roundup of LME phantom stocks – metal stored off-market but under a warehousing contract that explicitly allowed full exchange delivery.
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What the LME calls out-of-mandate stocks totaled just 256,000 tonnes at the end of February, down 88% from the 2 million tonnes of metal that remained in the shadows a year earlier.
The evaporation of this safety stock means that any call for metal from the market of last resort must be on the diminishing volume of recorded stock.
It helps explain why the 145-year-old industrial metals trading lady was swamped by ever-widening waves of market turmoil, culminating in the suspension of the nickel contract in March. Read more
When the LME began publishing its monthly Out of Mandate Stocks report in February 2020, it brought to light 971,145 tonnes of metal lurking in the shadows of warehouses.
At their peak a year later, shadow stocks stood at 2.09 million tonnes, slightly more than recorded stocks.
Much of the metal stored in this twilight zone was aluminum oscillating between on- and off-market storage in search of the best financing and warehousing deals.
Aluminum phantom stocks peaked at 1.74 million tonnes in February 2021. By the end of February this year, they had fallen to just 218,000 tonnes.
The magnitude of the decline argues against this being a case of owners choosing to move the metal away from the exchange’s warehouses to avoid statistical scrutiny. On the contrary, it suggests a radically altered market dynamic.
First, aluminum is now much more valuable as a physical unit. It commands a premium to LME cash of around $600 a tonne in the European duty-paid market and nearly $900 in the US Midwest.
Second, the drawdown on LME shares has tightened the forward curve, meaning fewer spread opportunities for lucrative equity finance trades.
In other words, the value of stored aluminum is now more important in the physical supply chain than in the financial realm and the metal leaves exchange warehouses accordingly.
It makes sense that fictitious inventory was depleted faster than market inventory because it is less sticky, does not require an exchange transaction, and warrants write-off to physically move through the supply chain.
The fact that fictitious and registered stocks of aluminum have fallen in parallel is a sign of an undersupplied market.
China, the world’s largest producer, imported nearly 2.65 million tonnes of aluminum in 2020 and 2021, depleting the rest of the world’s excess stocks.
What remains is fueled by supply chain gaps created by declining production in Europe as smelters in the region struggle to cope with soaring electricity prices. Read more
NO SAFETY NET
Virtual stocks of other metals have almost disappeared.
Out-of-mandate copper stocks have collapsed from 175,000 tonnes in February 2021 to just 18,352 tonnes at the end of February this year.
Nickel inventories also collapsed from 44,000 tonnes to 2,428 tonnes over the same period, while lead stocks totaled a meager 547 tonnes at the end of February.
Anyone looking for additional zinc a year ago could have mined 87,000 tonnes of virtual stockpiles. This buffer stock fell to 15,261 tonnes, most of it in LME Asian warehouses.
This explains why zinc stocks on the LME market have been looted to the tune of 60,000 tons since the beginning of April.
Foundry closures in Europe have deepened the regional deficit and sent physical premiums skyrocketing. With the notional LME stocks now nearly depleted, the only accessible source of replacement metal is zinc under an LME mandate.
The pressure on LME zinc stocks inevitably tightened time spreads and drove the price up three months, last traded to $4,500 a tonne.
With an actual tonnage available in the LME system of 45,925 tons, the market is now extremely sensitive to further cancellations.
OUT OF STOCK
The physical delivery function of the LME does what it is supposed to do during times of market scarcity.
Pandemic lockdowns, logistical disruptions and smelter cuts in Europe have generated a huge storm in the industrial metals supply chain.
LME stocks were drawn down to fill the resulting supply shortfalls, particularly in Europe.
But the result is higher pricing and increased volatility.
The tiny LME tin market has been operating for several months with extremely low inventories.
There was a recent rebuild to 2,665 tons following a warrant in Antwerp and Baltimore. But that still equates to less than three days of global usage, and there was just another 85 tonnes of virtual inventory in February.
Tin is a sold-out market and the result is unprecedented price strength, with the three-month LME metal currently trading at $42,800 per tonne and regular bouts of stress stretching over time.
If current trends continue, tin won’t be the only LME metal to be defined by physical rarity.
The opinions expressed here are those of the author, columnist for Reuters.
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Editing by Mike Harrison
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