Column: Scarcity changes the LME warehousing game: Andy Home

Infinity Logistics and Transport Ventures

15/08/2022 01:00

(Repeats Friday story without change)
    By Andy Home
    LONDON, Aug 12 (Reuters) - The London Metal Exchange's (LME)
global warehousing network is shrinking rapidly. 
    Over the past year the number of registered storage units
has slumped from 604 to 472, the lowest in at least a decade,
with the collective retreat reflecting the diminishing pool of
metal to be stored. 
    Total LME stocks, including so-called shadow inventory
stored off-market, stood at 1.031 million tonnes at the end of
June. That was down 700,000 tonnes from the start of January and
2.24 million tonnes less than in June 2021. 
    Scarcity in the physical supply chain has drained metal away
from the exchange, hitting rental revenue for storage suppliers.
    Less metal, particularly aluminium, also means less
opportunity to profit from the LME's arcane load-out rules. 
    Glencore's  GLEN.L  sale of its Access World warehousing arm
this year marked the last departure of the trade houses and
banks that moved into the LME storage business in the early
2010s.  urn:newsml:reuters.com:*:nL1N2UB1BS
    The buyer, Malaysia's Infinity Logistics and Transport
 1442.HK , typifies the shift in ownership as LME warehousing
returns to those in the business of warehousing rather than
trading.
    
     
    THE LAST ALUMINIUM QUEUE 
    Goldman Sachs  GS.N  led the charge into LME warehousing
with its purchase of Metro International in 2010. The bank was
betting that the global financial crisis would generate a
tsunami of unsold aluminium. 
    It did. LME-registered aluminium inventory mushroomed from
1.17 million tonnes in August 2008, just before the credit storm
broke, to 4.6 million tonnes a year later. 
    What the physical supply chain didn't want was a bonanza for
the financial sector as the surplus of metal created a
super-contango that turned the prosaic business of financing
stock into a major money earner. 
    With the profitability of the trade hinging on the cost of
storage, financiers had every incentive to move aluminium to
cheaper off-market rental deals. 
    This led to the infamous queues, first at Detroit and then
at the Dutch port of Vlissingen, as the LME's restrictive
load-out rates - designed for low-tonnage industrial users not
high-volume financial players - caused massive logjams of
departing aluminium. 
    Operators could use the income from queue-trapped metal to
attract fresh inflows, creating a merry-go-round effect and
lifting physical premiums ever higher. 
    The scandal drew the ire of some of the world's biggest
aluminium users, caused a stand-off with U.S. regulators and
forced the LME to embark on a lengthy campaign to constrain the
queue model. 
    The aluminium carousel continues to revolve in muted form at
Malaysia's Port Klang, where ISTIM has had a load-out queue at
the end of every month since February 2021. The wait for
aluminium was 109 days at the end of June.
    WINDING DOWN IN PORT KLANG
    Port Klang still holds the largest amount of aluminium in
the LME warehouse network. Stocks, both registered and shadow,
totalled 397,000 tonnes at the end of June, equivalent to 60% of
total exchange-linked aluminium inventory. 
    But that's a long way off the 1.7 million tonnes sitting the
city's warehouses as recently as February last year. 
    The aluminium carousel is also slowing for want of fresh
supply. Port Klang had 82,175 tonnes placed on warrant in the
first quarter of the year. Inflow dwindled to 14,825 tonnes in
the second quarter and has totalled 10,450 tonnes since the
start of July. 
    The amount of live tonnage that could keep the roundabout
spinning at the port has fallen to 80,175 tonnes from 430,000 at
the start of the year.
    It should come as no surprise then that warehousing capacity
in Port Klang has been cut sharply by just about every operator,
with the number of registered LME sheds tumbling to 51 from 130
a year ago, by far the largest change by location. Among the big
operators at the port, Access World has cut 32 units, ISTIM 18
and P.Global Services 16.
    Total LME-listed storage capacity at Port Klang shrank to
472,000 square metres at the end of June from 770,000 a year
earlier, accounting for almost half the 660,000 square metres of
shrinkage across the system as a whole. 
    Johor, also in Malaysia, registered the next largest
reduction of 87,000 square metres, closely followed by
Rotterdam, where capacity fell by 86,000 square metres. 
    Dutch neighbour Vlissingen lost another 49,000 with
registered capacity now at 67,500 square metres. At the height
of the queue mania in 2016 it boasted 560,000 square metres of
LME storage capacity.  
    Only one LME good-delivery location - Owensboro in the
United States - registered capacity growth in the past year and
that was by only 4,000 square metres thanks to a new listing by
Grafton Warehouse Services. 
    Grafton was the only company among 27 registered LME
warehouse operators to increase the number of units over the
past 12 months. 
        
    BACK TO BASICS
    When Goldman demonstrated the money-making potential of
aluminium surplus at Detroit, others were quick to join the
party. 
    Glencore  GLEN.L , J.P.Morgan  JPM.N , Trafigura, Noble
Group  NOBG.SI , Mercuria  7190.T  and Brazil's BTG Pactual
 BPAC3.SA  were all involved in the LME storage business at some
stage in the 2010s.
    At the peak of this investment wave in July 2014 warehouse
units directly controlled by or related to metals trading
entities accounted for 62% of the LME network. The ratio has
since fallen to 6%.
    Goldman, the first to arrive, was the first to leave in 2014
after finding itself caught in the eye of the media storm that
broke over the Detroit load-out queues. 
    Some tried to recreate the queue model but failed and left
LME warehousing. One went disastrously wrong, with the LME
delisting Worldwide Warehouse Solutions, then owned by
Singapore's Golden Dragon Resources, owing to a financial
meltdown in 2018.
    Markets are now causing the LME warehousing landscape to
change again. 
    The boom that attracted Wall Street heavyweights and
commodity traders alike was predicated on surplus metal that
needed storing and financing in a logistical system that wasn't
designed to cope with operators playing for such high-tonnage
financial stakes. 
    Warehousing became the tail that wagged the global aluminium
market, hard-wired into the shifting flows of metal between
registered and shadow storage and for a time into physical
premiums. 
    That time of plenty has turned into a time of scarcity and
LME warehousing is returning to the purely logistical 
facilitator it used to be before Goldman saw gold in the
aluminium mountains.   
    
    The opinions expressed here are those of the author, a
columnist for Reuters.

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
London Metal Exchange warehouse units lowest in a decade as
stocks leave    https://tmsnrt.rs/3BXLqTj
LME warehouse capacity down by 15% in the year to June    https://tmsnrt.rs/3pd6YDW
LME warehouse operators delist LME storage capacity    https://tmsnrt.rs/3SNYYH9
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Editing by David Goodman)
 ((andy.home@thomsonreuters.com, 44-207-542-4412 and on Twitter
https://twitter.com/AndyHomeMetals))