Aluminium stocks on the London Metal Exchange (LME) are poised to hit another all-time record above five million tonnes (mt) as soon as next week in a market swamped by a structural surplus.
Stocks are also likely to keep touching fresh records throughout next year as no end is in sight to chronic oversupply, analysts and traders said.
Stocks have ballooned since the 2008 financial crisis, as banks spotted money making opportunities from financing deals that effectively locked material in warehouses and as top producer China kept churning out metal as it subsidised loss-making plants to save jobs.
“The market's still generating surpluses, so the stocks have got to go somewhere. Sometimes it goes into unreported stocks and sometimes it ends up on the LME,” said analyst Stephen Briggs at BNP Paribas in London.
Stocks in LME registered warehouses of the light-gray metal used in packaging and transport rose yesterday to 5,105,425 tonnes, just 20,375 tonnes short of the previous record set on February 20.
The LME, the world’s largest base metals marketplace, oversees a global network of such warehouses, which are meant in part to ensure that industrial consumers can take delivery of stock against the exchange’s contracts if necessary - a so-called market of last resort.
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Some users complain that the LME is not ensuring this role because its regulations allow long backlogs at warehouses, forcing consumers to wait many months to access metal. The LME announced proposed revised rules on Thursday aimed at relieving some of the logjams, but analysts said they would do little to reduce the long queues.
Producer destocking
“We’re in a surplus and we’ll continue to be a surplus for the foreseeable future, especially with new production coming on next year,” said a metal trader in London who specialises in aluminium.
Flows into warehouses were typically stronger at the end of the year as producers tidy up their own inventories, he added.
“You’re probably seeing more material becoming available in the fourth quarter as the producers destock and clear the decks for year end.”
A steady drip-feed of metal from the world's top producer, Russia's RUSAL, into Glencore International Dutch warehouses in Vlissingen was also inflating supply, traders said.
In April, the companies signed a seven-year deal for RUSAL to supply 1.4 million tonnes this year alone. Rivalries between warehouse companies to attract metal to earn lucrative storage fees has also been behind some of the fluctuations in LME stocks, Briggs said.
“You see these waves of stocks going up and then stocks going down and I think that largely reflects material being in transit from one LME warehouse to another as these battles carry on. Now, we happen to be at a point now where stuff is coming in,” Briggs said.