LONDON, June 11 (Reuters) - The London Metal Exchange's (LME) aluminium stocks saga took an unexpected turn last month.
In April it was all about Russian metal.
The latest U.S. sanctions package prohibited exchanges from accepting Russian aluminium produced after April 12. The LME had to tweak its rules to prevent traders sending existing stocks of Russian brand metal on a creative run-around.
The threat of more Russian metal produced before the cut-off date being delivered to the LME loomed large.
Sure enough, there was a massive stocks dump on May 9. The single-day warranting of 425,575 metric tons was huge even by the standards of the LME aluminium market. The reverse cancellation of 137,050 tons of stocks on the same day made it even bigger.
But just about all of the metal was Indian not Russian and the action took place at Malaysia's Port Klang and not the South Korean port of Gwangyang, the favoured LME delivery point for Russian brand aluminium.
Another 226,950 tons followed over the ensuing two weeks.
Buyers have been quick to snap up what was delivered. Those looking to move their metal, however, may be facing a load-out queue of up to 159 days.
Which of course was the intention of the stocks dump. Storage dynamics were behind April's Russian play and they're at the heart of the current stocks churn.
They always are when there's too much aluminium around.
A PROFITABLE QUEUE
Last month's massive deliveries went to one warehouse operator in Port Klang.
ISTIM UK Ltd's sheds received a total 652,525 tons of aluminium in May, according to the LME's latest monthly warehouse report.
Around 250,000 tons were cancelled by the end of the month, lifting ISTIM's total cancelled tonnage to 458,375 tons. The mass transfer of metal has created the longest load-out queue since June 2021.
Why is so much recently-delivered metal on its way out again? Because the new owners find themselves locked into a storage deal that will see their rent split between ISTIM and the entity that delivered the metal, widely reported to be trade house Trafigura.
The only way to break that deal is to cancel the warrants and physically move the metal to another warehouse operator. Many are doing just that, evidently calculating that the cost of sitting in the queue is worth it.
The revenue to be generated from a load-out queue is not what it was in the 2010s, when months-long waits to get aluminium out of Detroit distorted the relationship between LME and physical market pricing.
The exchange has tightened its rules to include faster load-out rates and a cap on revenue that can be charged for metal caught in a queue.
But a queue is still a profitable business for the warehouse operator, who can use the expected revenue to entice metal with a rent-sharing deal in the knowledge that the new owners will rush for the exit door just as soon as possible.
ISTIM has used the model for many years, turning Port Klang into a hub of LME aluminium stocks liquidity. There were only 10 months over the 2019-2023 period when there wasn't a load-out queue at ISTIM. Most of the time it was a log-jam of aluminium.
Last month's action fits into a historical pattern of surplus aluminium flowing to ISTIM's Malaysian warehouses only to be cancelled and loaded out again.
RUSSIAN RIDDLE
Last month's warranting action at Port Klang should have largely exhausted shadow stocks at the Malaysian port.
There were almost 687,500 tons of what the LME terms "off-warrant" stocks at Port Klang at the end of April. That's metal being stored under a warehouse deal with the option of full LME delivery, an option that was clearly called last month.
Still hovering over the aluminium market, though, is the question of whether unsold Russian metal produced before April 12 makes it way to LME warehouses.
The amount of Russian metal in LME sheds increased from 116,325 to 246,950 tons over the course of May. The LME only counts warranted inventory in its monthly origins report and the increase was largely down to re-warranting not fresh warranting activity.
When the LME reworked its Russian warranting rules to stop traders gaming the sanctions, almost 89,000 tons of previously cancelled Russian metal were re-warranted at Gwangyang, serving to boost the on-warrant total.
The port has seen no deliveries onto warrant since the middle of April. Only 1,875 tons of Russian metal produced before April 12 but not previously in the LME system have so far shown up across the exchange's storage network.
TOO MUCH ALUMINIUM?
Aluminium is a big market. With annual primary production of 70 million tons it is more than twice the size of the global copper market.
It is also a sector prone to over-production, high inventory and a resulting need for stocks financiers.
Storage costs are the key variable in the stocks financing trade, meaning warehouse arbitrage can at times be more important than physical arbitrage to LME pricing.
That's particularly true if there is a lot of inventory hanging around, as seems to be the case right now.
Whoever dumped so much aluminium onto the LME was expressing a view there is more money to be made out of the stuff in a warehouse deal than in the physical market.
Others may disagree but it's worth noting that even with 47% of LME warehouse stocks now cancelled and waiting physical load-out, the nearby spreads have ballooned wider into super-contango territory.
The benchmark LME cash-to-three-months period
That suggests there is still a lot of metal hanging over the market with the implication there may be more LME stocks surprises to come.
The opinions expressed here are those of the author, a columnist for Reuters (Editing by David Evans)
