The London Metal Exchange‘s (LME) aluminium stocks saga took a surprising twist last month, focusing initially on Russian metal.
In April, new U.S. sanctions prohibited exchanges from accepting Russian aluminium produced after April 12.
The LME adjusted its rules to prevent traders from circumventing these sanctions by creatively moving existing Russian metal stocks.
The looming threat was the delivery of Russian metal produced before the cutoff date to the LME.
On May 9, there was a significant stock dump of 425,575 metric tons, an unusually large single-day warranting.
However, almost all of this metal was Indian, not Russian, and the activity occurred at Malaysia’s Port Klang instead of South Korea’s Gwangyang, a preferred delivery point for Russian aluminium.
An additional 226,950 tons followed in the next two weeks.
Buyers quickly snapped up the delivered metal, but those moving their metal faced a load-out queue of up to 159 days, which was the intended outcome of the stock dump.
Storage dynamics drove both April’s Russian metal play and the recent stocks churn, reflecting a recurring issue when there’s a surplus of aluminium.
Last month’s deliveries went to one warehouse operator in Port Klang, ISTIM UK Ltd.
Their sheds received a total of 652,525 tons of aluminium in May, with 250,000 tons canceled by the end of the month, creating the longest load-out queue since June 2021.
The influx of metal into warehouses and the subsequent cancellations are linked to storage deals where rent is split between ISTIM and the delivering entity, reportedly trade house Trafigura.
To break this arrangement, new owners must cancel the warrants and move the metal to another warehouse, despite the cost of sitting in the queue being considered worthwhile.
The profitability of these queues has decreased since the 2010s due to tightened LME rules on load-out rates and revenue caps.
Nonetheless, queues remain profitable for warehouse operators, allowing them to entice metal with rent-sharing deals, knowing owners will seek to exit quickly.
ISTIM has effectively used this model for years, making Port Klang a hub for LME aluminium stocks. Over 2019-2023, only 10 months lacked a load-out queue at ISTIM, typically a log-jam of aluminium.
The warranting action at Port Klang likely depleted shadow stocks there.
At the end of April, Port Klang had almost 687,500 tons of “off-warrant” stocks, metal stored under a warehouse deal with LME delivery as an option, which was evidently exercised last month.
The question remains whether unsold Russian metal produced before April 12 will end up in LME warehouses.
Russian metal in LME sheds increased from 116,325 to 246,950 tons in May, largely due to re-warranting.
Since mid-April, no new deliveries of Russian metal onto warrant have occurred, and only 1,875 tons of previously unwarranted Russian metal have appeared in the LME system.
Aluminium, with an annual primary production of 70 million tons, is prone to over-production and high inventory, necessitating stock financiers.
Storage costs are crucial in stock financing trades, sometimes outweighing physical arbitrage in LME pricing.
With a lot of inventory currently available, whoever dumped large amounts of aluminium on the LME likely believes warehouse deals are more profitable than physical market sales.
This is evident even as 47% of LME warehouse stocks are canceled and awaiting load-out, with nearby spreads widening into super-contango territory.
The benchmark LME cash-to-three-months period closed Monday at a contango of $63 per ton, the widest in at least 15 years, indicating a significant metal surplus and potential for more LME stock surprises.