By Andy Home
LONDON- The London Metal Exchange’s (LME) global warehouse network held 654,345 tons of metal at the end of December, less than half the tonnage registered at the close of 2021.
It’s the lowest end-year inventory in the system this century and reflects two years of steady withdrawals which have left exchange stocks of metals such as zinc and lead almost depleted.
There has been a mirror drawdown of what the LME calls off-warrant stocks, meaning metal that is being stored off-market but with the option of exchange warranting.
LME warehouse operators have slashed storage capacity by 15 percent over the last 12 months as ever less metal rests with the market of last resort.
This is not just an LME phenomenon. Shanghai Futures Exchange (ShFE) warehouse stocks also ended the year at their lowest level since 2007.
Exchange inventories are just one component of the bigger inventory picture but can have an outsize impact on price, particularly time-spreads. It’s no coincidence that all the LME base metals have experienced bouts of extreme tightness over the last couple of years.
The turbulence is likely to continue until there is a sustained rebuild in inventory back to historical norms.
Registered stocks of all the LME base metals fell last year with the single exception of tin, which rose by a modest 950 tons to 2,995 tons. It’s still a very low stocks level relative to the past and represents just a couple of days’ worth of global consumption.
Copper stocks ended the year flat at a bombed-out 88,550 tons, an early-year rebuild having gone into reverse over the second half of 2022.
Registered nickel stocks fell by 45 percent year-on-year, aluminum stocks by 52 percent, lead by 54 percent and zinc by 85 percent.
Even the low headline figure of 654,345 tons at the end of December flatters to deceive.
Around 45 percent of that tonnage was awaiting physical load-out, leaving live stocks at just 357,000 tons.
Off-warrant stocks have also collapsed over the last couple of years. They totaled 239,386 tons at the end of November, down from 1,879,261 tons at the end of 2020.
Most of the remaining shadow inventory is aluminum. It accounted for 189,000 tons at the end of November, just about all of it at Asian locations, which continue to see rotation of metal between on-exchange and shadow stocks as financiers play the storage-spreads game.
The only other significant shadow stocks at the end of November were the 34,000 tons of zinc in Singapore. This metal, so far at least, has failed to make its way onto LME warrant and there’s no guarantee it will do.
The LME is competing for metal with a physical supply chain that has been severely dislocated first by COVID-19 and then by Europe’s energy crisis.
Metal users in Western markets have been prepared to pay eye-watering premiums to fill gaps in their intake books.
Zinc smelter closures in Europe, for example, mean that a ton of refined zinc can fetch $500 over and above the LME cash price. The LME contract is in backwardation but the cash premium over three-month metal is a relatively modest $20 per ton.
Spare zinc units are more valuable in the physical supply chain than in the terminal market.
That’s going to remain the case going forwards with Fastmarkets reporting that annual 2023 premiums are settling close to spot assessments, almost double last year’s level.
The same is true of the other base metals.
Aluminum premiums peaked in the second quarter of last year but a ton of ingot can still command a premium of around $550 over LME cash in the US Midwest and of over $200 in Europe.
Only in Asia is the physical premium low enough at around $80 per ton to allow LME warehousers to compete for new inventory.
Everywhere else, high physical premiums for all metals are proving sticky, maintaining the incentive to divert spare units from exchange delivery.
That’s not to say there hasn’t been gaming of LME inventories at times over the past couple of years, but the games are predicated on there not being much spare metal around for LME delivery in the first place.