The London Metal Exchange’s (LME) global warehousing network is rapidly shrinking.
Over the past year, the number of registered storage units has fallen from 604 to 472, the lowest in at least a decade, with the collective decline reflecting the dwindling reservoir of metal to be stored.
Total LME stocks, including so-called virtual stocks stored off-market, stood at 1.031 million tonnes at the end of June. This was down 700,000 tonnes from early January and 2.24 million tonnes lower than June 2021.
The scarcity of the physical supply chain has drained the metal from the exchange, which has impacted the rental income of storage providers.
Less metal, especially aluminum, also means fewer opportunities to take advantage of the LME’s arcane loading rules.
Glencore’s sale of its Access World storage arm this year marked the latest departure for trading houses and banks that entered the LME storage business in the early 2010s.
The buyer, Malaysian Infinity Logistics and Transport, exemplifies the change in ownership as LME warehousing reverts to those dealing with warehousing rather than trading.
GRAPH: London Metal Exchange Warehouse Units are at a decade low as stocks deplete (https://fingfx.thomsonreuters.com/gfx/ce/myvmnealzpr/LME%20Warehouse%20Units%20Aug%202022 .PNG)
THE LAST QUEUE IN ALUMINUM
Goldman Sachs led the charge in 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 aluminum.
It made. Aluminum stocks recorded on the LME rose from 1.17 million tonnes in August 2008, just before the credit storm hit, to 4.6 million tonnes a year later.
What the physical supply chain didn’t want was a windfall for the financial sector, as the excess metal created a super-contango that turned the prosaic business of equity finance into a major revenue stream. .
With the profitability of the trade dependent on the cost of storage, financiers had every interest in moving aluminum to cheaper off-market rental deals.
This led to the infamous queues, first in Detroit and then at the Dutch port of Vlissingen, as the LME’s restrictive loading rates – designed for low-tonnage industrial users and not high-volume financial players – caused massive aluminum traffic jams initially.
Operators could use revenue from the metal trapped in queues to attract new flows, creating a merry-go-round effect and further increasing physical bounties.
The scandal has angered some of the world’s biggest aluminum users, sparked a confrontation with US regulators and forced the LME to embark on a long campaign to limit the queuing model.
The aluminum carousel continues to run muted at Port Klang in Malaysia, where ISTIM has had a loading queue at the end of every month since February 2021. The wait for aluminum was 109 days end June.
GRAPH: LME warehouse capacity decreased 15% in the year to June (https://fingfx.thomsonreuters.com/gfx/ce/zgpomgnqrpd/LME%20Warehouse%20Capacity%20June%202022 .PNG)
RELAX IN PORT KLANG
Port Klang still holds the largest amount of aluminum in the LME’s network of warehouses. Stocks, both registered and fictitious, amounted to 397,000 tonnes at the end of June, or 60% of the total trade-related aluminum stock.
But that’s a far cry from the 1.7 million tonnes that sat in the city’s warehouses as recently as February last year.
The aluminum carousel is also slowing down due to a lack of fresh supplies. Port Klang had 82,175 tonnes placed under warrant in the first quarter of the year. The inflow decreased to 14,825 tons in the second quarter and has totaled 10,450 tons since the beginning of July.
The amount of live tonnage that could run the roundabout at the port has fallen to 80,175 tonnes from 430,000 at the start of the year.
It is therefore not surprising that storage capacity at Port Klang has been sharply reduced by almost all operators, with the number of registered LME hangars falling from 130 a year ago to 51, by far the biggest change by location. Among the major port operators, Access World cut 32 units, ISTIM 18 and P.Global Services 16.
Total storage capacity listed by the LME at Port Klang fell to 472,000 square meters at the end of June, from 770,000 a year earlier, representing almost half of the 660,000 square meters of shrinkage in the entire system .
Johor, also in Malaysia, saw the second-largest reduction of 87,000 square meters, closely followed by Rotterdam, where capacity fell by 86,000 square meters.
Dutch neighbor Vlissingen lost another 49,000 with a registered capacity now of 67,500 square meters. At the height of the queue mania in 2016, it had 560,000 square meters of LME storage capacity.
Only one LME freight delivery site – Owensboro in the US – has seen capacity growth in the past year and it has been just 4,000 square meters thanks to a relisting by Grafton Warehouse Services.
Grafton was the only company among the 27 registered LME warehouse operators to increase the number of units in the last 12 months.
GRAPHIC: LME warehouse operators remove LME storage capacity (https://fingfx.thomsonreuters.com/gfx/ce/zdpxozqbevx/LME%20Warehousing%202022%20Changes%20by%20Operator.PNG)
BACK TO BASICS
When Goldman demonstrated the money-making potential of excess aluminum in Detroit, others were quick to join in the fun.
Glencore, JPMorgan, Trafigura, Noble Group, Mercuria and Brazil’s BTG Pactual were all involved in the LME storage business at some point in the 2010s.
At the height of this wave of investment in July 2014, warehouses directly controlled by or linked to metal trading entities accounted for 62% of the LME network. The ratio has since fallen to 6%.
Goldman, first in, was first out in 2014 after finding itself caught in the eye of the media storm that swept through Detroit’s loading queues.
Some tried to recreate the queue model but failed and left the LME warehouse. One went awry, as the LME delisted Worldwide Warehouse Solutions, then owned by Singapore’s Golden Dragon Resources, due to a financial meltdown in 2018.
Markets are changing the warehousing landscape at the LME again.
The boom that attracted Wall Street heavyweights and commodity traders was based on excess metal that had to be stored and financed in a logistics system that was not designed to deal with operators playing for financial stakes as important.
Warehousing became the tail that rocked the global aluminum market, hardwired into the shifting flows of metal between registered storage and parallel storage and for a time into physical premiums.
This time of plenty has turned into a time of scarcity, and LME warehousing is once again becoming the purely logistical facilitator it was before Goldman saw gold in the mountains of aluminum.
The opinions expressed here are those of the author, columnist for Reuters.
(Editing by David Goodman)
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