Concerns build among traders about LME warehouse stocks
Physical metal and London Metal Exchange warrant traders have voiced increasing concerns to Fastmarkets over the current low stock levels in LME-listed warehouses globally
On-warrant base metals stocks in LME warehouses totaled 400,302 tonnes on Wednesday August 17, with total stocks standing at 579,979 tonnes. This represents a 58% decrease in total stocks since the beginning of the year, when stocks stood at 1,380,100 tonnes globally.
“Most markets fundamentally remain tight at the moment; everywhere you look stocks are falling,” a trader told Fastmarkets.
While some base metals, such as zinc, have registered a sharp decline in stock levels with some participants turning to the so-called “market of last resort” to meet strong demand in the face of smelter production cuts, others have declined much more gradually in the face of supply chain disruptions and stronger demand.
But all base metals stocks currently stand at multi-year lows, with some participants noting that they are currently at their lowest level in the 21st century.
Concerns are therefore also rising among traders that the gravity of the current supply situation has not reached all consumers.
“My concern is that some people in the market, particularly consumers, are sleepwalking at the moment,” a second trader told Fastmarkets, adding that they were especially worried that “when the markets get back to normal activity in September, people are going to panic.”
A similar decline is also being seen in the size of the LME warehouse footprint.
The latest LME data showed that in June 2022 there were 3,688,830 square meters of warehouse space across all listed locations, with the top three locations being Rotterdam with 634,462 square meters, Busan with 559,696 square meters and Port Klang with 472,281 square meters.
By comparison, in June 2021 there was 4,348,441 square meters of LME warehouse capacity in all locations. If you go back seven years to June 2015, total warehouse space was nearly 30% higher with 5,213,177 square meters available; of which there was over 808,00 square meters in Rotterdam.
There has been a major decline in warehouse space in the United States. LME warehouses in the US in 2015 had 1,678,33 square meters of capacity alone – including 779,143 square meters in Detroit. In June 2022, data shows that there is only 134,843 square meters in Detroit and 648,274 square meters in the whole of the US.
“Warehouse levels have been declining because there isn’t the same demand to put those units in the sheds as there used to be. We had a brief time earlier in the pandemic where the LME saw a surge in units – but that quickly got sucked up,” another market source said.
The situation is particularly acute in copper, where the market has become increasingly sensitive to Russian brands of metal after Russia’s invasion of Ukraine and the subsequent difficulties with financing the material.
“None of our customers are willing to take Russian material, which limits what we can offer,” a third trader said.
Traders reported to Fastmarkets that some warehouses in Southeast Asia, including Singapore, now contain only Russia-origin copper cathodes.
Other traders estimated that at present, more than half the copper warrants in warehouses could be of Russian origin, implying an even tighter market than shown on paper if these units cannot be financed or accepted by consumers.
The LME only releases stock level by source of origin on an annual basis; the last release was on 31 March 2022, when it showed 92,699 tonnes of the 992,323 base metals tonnes on warrant were of Eastern European origin. At the time, there was 31,825 tonnes of Eastern European-origin copper in the system, 33% of all copper as of 31 March 2022.
The LME confirmed to Fastmarkets that for the purpose of this data set, Russian production falls under the Eastern European-origin section.
“If you go through clearing, almost all of it will be Russian,” the second trader said.
There are no official sanctions around the importing and trade of Russian material, although some countries have introduced duties on these units.
Despite this, some companies are publicly self-sanctioning. Across the base metals, even if participants are willing to carry Russian units, many are struggling to finance this material as seen in nickel and aluminium.
“The LME continues to take the required action to ensure market stability in response to sanctions that impact the LME market,” a spokesperson for the LME told Fastmarkets.
“We do not currently plan to take independent action outside of the scope of sanctions – for example, by placing universal restrictions on the circulation of metal produced in Russia within the LME system – since the impact of taking such steps would not be limited solely to the LME’s business but would extend to all those participating in the global market; it would in effect be an action taken on behalf of the LME’s global user base,” the spokesperson added.
The exchange added that its priority was to maintain an orderly market for the benefit of all market participants, and that they will “keep the situation under constant review and ensure we maintain a dialogue with governments as the situation evolves.”
On-warrant copper stocks stand at 89,625 tonnes as of Thursday, with warehouses in New Orleans, Kaohsiung and Busan storing the largest tonnages.
Stock volatility is nothing new to the copper market, following large cancellations of material in October 2021, the LME imposed measures to maintain market orderliness and encourage warranting of stocks.
“While stocks have rallied from the 2021 lows, things in copper could get nasty again,” the second trader said. “Going back to the 2021 levels is not out of the question.
But the market remains a long way from this situation at present. At the time the LME imposed measures on the market, on-warrant copper stocks stood at just 17,875 tonnes globally.
In relation to the low stock levels, the LME told Fastmarkets; “In March we implemented a number of additional controls on LME metals to address the low stocks environment – including a backwardation limit and deferred delivery mechanism – which are designed to ensure continued market orderliness. We continue to monitor the situation closely to ensure market activity remains orderly.”
Market participants keep close eye on zinc
Outside of copper, participants also noted significant concerns around LME zinc stocks, which already remain fundamentally tight.
Following the announcement that producer Nyrstar would be putting its 315,000-tonne Budel smelter on care and maintenance, participants noted that further drawdowns in stock could be on the horizon.
Warrant traders noted that due to fears of tightness, customers were now more willing to accept material in less favorable location and brands.
“In this market, one day [stocks] all could just go,” the third trader noted. “People are now taking this [previously unfavorable] material, but remain increasingly price sensitive.”
Fastmarkets assessed the zinc SHG min 99.995% warrant premium, in-whs Southeast Asia, at $15-40 per tonne on Wednesday, with the range reflecting the difference in prices between premium and non-premium brands of zinc.
Concerns also surround aluminium
Aluminium is also a concern for many market participants, particularly the emerging disconnects between stock levels and underlying LME prices.
Aluminium has the highest volume of stocks on the LME – but those are also considerably lower than usual stock levels. As of Wednesday, 276,875 tonnes of aluminium were in LME sheds – with just over 170,000 tonnes on warrant and freely available.
In recent years, LME aluminium stocks were regularly above 1 million tonnes – but there have not been over 1 million tonnes of aluminium in the system since November 2021.
On August 17, 2021, there were over 1.3 million tonnes of aluminium stocks in LME warehouses, while on August 17, 2016, there were over 2.2 million tonnes of aluminium units in the system.
“The levels of aluminium stocks in the warehouses are unbelievable, when you look at it as the ‘market of last resort’ it should scare people,” a fourth trader said.
“The concern is about what will be left in the system – will it just be old units that were produced a long time ago, high-carbon units, or unpreferred brands,” another market source said.