Friday, 3 January 2014

Aluminium queues get bigger

Aluminium warehouses continued to accumulate metal at the end of 2013, with total LME inventories rising by ~83kt.  And despite the new LME load out rules, inventory has become more concentrated at Vlissingen and Detroit, which are two warehouses which will be classified as "affected" once the new rules become binding.

Carry trades have not become any less attractive in the past few months.  The contango in aluminium curve remains steep and with prices weak, these trades can pick up more metal for their dollar.

Strong interest in carry trades has also helped keep aluminium premiums high.  As explained in this post, this is because the new rules are not particularly binding at present given we are still in the first calculation period.  This has meant that until 31 March, warehouses are likely to load-in as much metal as they will load-out, which will only keep queues for metal at high levels rather than reduce them.

In the last few months, the two key affected warehouses for aluminium in Vlissigen and Detroit have been accumulating much more metal than they have been delivering.  Since 1 Nov, Vlissingen inventory has risen by 73kt.

As shown in the chart on the left, Detroit has seen an even larger inflow of metal of 137kt over the same period.

As fresh metal has come into these warehouses, presumably under carry-trades, cancelled warrants have also risen, particularly at Detroit.  Its likely that because the queue for delivery is now so long that warrants are cancelled almost as soon as metal goes in.

So far its hard to say that the new LME rules have had any impact, with queues at these warehouses actually getting bigger rather than smaller.

But this is because the rule changes are not binding yet. Once the rules become more stringent into mid-2014, premiums in particular should show more meaningful signs of weakening.