Column: LME warehousers slash capacity as metal stocks drain away: Andy Home

Infinity Logistics and Transport Ventures

17/02/2022 14:51

By Andy Home
    LONDON, Feb 17 (Reuters) - Glencore's  GLEN.L  decision to
sell its warehousing and logistics business looks like a
well-timed call on the metals storage market.  urn:newsml:reuters.com:*:nL1N2UB1BS
    It bought Access World in 2010 in the wake of the financial
crisis, which generated a surge of metal, particularly
aluminium, into London Metal Exchange (LME) warehouses. 
    Total LME inventory of all metals mushroomed from 3.41
million tonnes at the start of 2009 to a peak of 7.75 million in
June 2013. 
    Glencore wasn't alone in seeing the opportunities created by
the metal glut. Goldman Sachs  GS.N  had already snapped up
another LME warehousing company - Metro - and others would
follow. 
    Fast forward to 2022, however, and the outlook for LME
warehousing companies is very different. 
    Exchange stocks have been draining away as pandemic demand
recovery collides with disrupted supply chains across the base
metals spectrum. 
    Deficit markets have sucked metal out of the LME system and
warehousers have responded by aggressively cutting storage
capacity. 
    
    
    CAPACITY SHRINKAGE
    Total LME registered storage space shrank by 290,500 square
metres to 4.06 million square metres over the second half of
2021, reversing five consecutive quarters of expansion. 
    The LME's delisting of the German port of Bremen as a good
delivery location accounted for 29,900 square metres of the
decline but there were bigger falls at Rotterdam (45,090 square
metres) and the Malaysian ports of Johor (50,583) and Port Klang
(121,783). 
    The latter has emerged as the largest LME storage hub for
aluminium in recent years with registered warehouse capacity
growing by 85% between June 2019 and June 2021, at which stage
it had overtaken Rotterdam to claim the number one spot. 
    It's probably no coincidence that Infinity Logistics
 1442.HK , which has just bought Access World for $176.7
million, is a Malaysian company. 
    But it means Port Klang is particularly exposed to the
broader trend of declining exchange-registered stocks. 
    
    STOCKS SLUMP
    Total LME registered storage capacity peaked at 4.35 million
square metres at the end of June 2021 after expanding steadily
over 2020 in response to an influx of surplus metal generated by
pandemic lockdowns. 
    LME stocks rose by 1.25 million tonnes in 2020. The
337,000-tonne increase in registered inventory was dwarfed by a
908,000-tonne jump in so-called shadow stocks. 
    These are stocks sitting in cheaper off-market storage but
with explicit contractual reference to the option of LME
warranting. The LME delivery process can be effected at the
stroke of a keyboard, which is why large tonnages of metal can
mysteriously appear overnight in the LME's official stock
figures.     
    Just as such shadow stocks rose faster than registered
stocks in 2020, so have they fallen harder since the start of
2021. By the end of December they totalled just 339,941 tonnes,
down from a February peak of 2.09 million. 
    The year-on-year decline was 1.54 million tonnes, eclipsing
the 665,000-tonne draw on registered stocks. 
    Shadow stocks are easier to move into the physical supply
chain than on-warrant metal, which has to be cancelled and may
have to sit in a queue before being physically loaded out. The
waiting time for aluminium at Port Klang was 142 days at the end
of January for example.
    The bigger takeaway, however, is that total LME registered
tonnage - on-warrant and off-warrant - slumped by over 2.2
million tonnes, or 56%, to 1.73 million tonnes last year. 
    Which is why LME warehousing companies have been delisting
ever more units. Another nine have gone since the start of
January, meaning the shrinkage in storage capacity is
continuing. 
    
    STOCKED OUT
    LME storage has been dominated by one metal - aluminium -
for the last decade. 
    It's a bigger market than any of the other base metals and
aluminium smelters can't be turned off quickly in response to
changes in demand, which is why aluminium stocks mushroomed to
such an extent after the global finiancial crisis.
    They did so again early in the COVID-19 crisis but then
everything changed as China, the world's largest producer,
started importing primary aluminium to compensate for
energy-driven smelter curtailments
    LME aluminium stocks fell by 406,000 tonnes last year and
are down by another 79,000 tonnes so far this year even after
the mass warranting of 126,000 tonnes earlier this month. 
    The market was underwhelmed by the mass arrival, probably
because it knows the pool of ready-to-warrant shadow stocks is
much smaller than it was, totalling just 297,000 tonnes at the
end of December, compared with 1.58 million a year earlier. 
    Declines in shadow stocks were even more dramatic in the
other metals last year. 
    Copper shadow stocks shrank by 90% to just 13,000 tonnes at
the end of December. Shadow stocks of nickel fell by 92% to
2,700 tonnes, those of zinc by 81% to 23,500 tonnes and shadow
lead stocks were a paltry 876 tonnes at the close of 2021.
    
    BULL SIGNAL BUT NOT FOR WAREHOUSERS
    This clear-out of LME shadow stocks and the simultaneous
decline in registered inventory attests to the scale of the
supply gaps that have opened up across the metals markets. 
    What is a bull signal for prices may be less good news for
those in the business of storing excess metal. 
    It's worth noting that all the core LME base metals have
been trading in backwardation, the cash premium spiking to 
extreme levels in the case of tin and copper at times last year.
    Yet even these unprecedented cash premiums haven't attracted
enough metal onto LME warrant to halt the overall slide in
visible stocks. With ready-to-warrant shadow stocks almost gone
in many cases, exchange warehousers are directly competing for
units with physical buyers, who have been paying up record
premiums to get metal. 
    Most analysts expect some easing of supply and logistics
pressures this year, which may see some replenishment of
depleted LME inventories. 
    But the longer-term prognosis is that the world needs more
metals such as copper, aluminium and nickel to enable
decarbonisation. 
    Producers' ability to deliver that extra metal while
simultaneously cutting their own carbon emissions looks highly
questionable right now. 
    Supply deficits could become the new norm of the green
revolution, which means less metal heading to terminal markets
such as the LME. 
    You can see why Glencore has decided to call time on its
warehousing business. There may be more money to be made in
supplying sought-after metal to the physical supply chain than
the storage market. 
    
    The opinions expressed here are those of the author, a
columnist for Reuters

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
LME warehousing capacity total and quarterly change    https://tmsnrt.rs/34GdOvb
London Metal Exchange registered and shadow stocks    https://tmsnrt.rs/3I0Qkz3
LME registered and shadow stocks of aluminium monthly change and
total    https://tmsnrt.rs/3Bq4eZa
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Editing by David Evans)
 ((andy.home@thomsonreuters.com, 44-207-542-4412 and on Twitter
https://twitter.com/AndyHomeMetals))