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(Repeats February 17 column without change)
By Andy Home
LONDON, Feb 17 (Reuters) – Glencore’s decision to sell its warehousing and logistics business appears to be a timely call in the metal storage market.
It bought Access World in 2010 in the wake of the financial crisis, which generated an influx of metals, especially aluminium, into the warehouses of the London Metal Exchange (LME).
The LME’s total inventory of all metals increased from 3.41 million tonnes at the start of 2009 to a peak of 7.75 million in June 2013.
Glencore was not alone in seeing the opportunities created by the glut of metals. Goldman Sachs had already purchased another LME warehousing company – Metro – and more would follow.
Fast forward to 2022, however, and the outlook for LME warehousing companies is very different.
Exchange stocks have sold out as the pandemic demand recovery comes up against disrupted supply chains across the base metal spectrum.
Lost markets sucked the metal out of the LME system and warehousemen responded by aggressively cutting storage capacity.
CAPACITY REDUCTION
Total registered storage space at the LME shrank by 290,500 square meters to 4.06 million square meters in the second half of 2021, reversing five consecutive quarters of expansion.
The LME delisting of the German port of Bremen as a good place of delivery accounted for 29,900 square meters of the drop, but there were larger drops in Rotterdam (45,090 square meters) and the Malaysian ports of Johor (50,583) and Port Klang (121,783).
The latter has become the largest LME storage center for aluminum in recent years, with recorded storage capacity growing by 85% between June 2019 and June 2021, by which time it had overtaken Rotterdam to claim the top spot. .
It’s probably no coincidence that Infinity Logistics, which just bought Access World for $176.7 million, is a Malaysian company.
But it does mean that Port Klang is particularly exposed to the broader stock market downtrend.
COLLAPSE OF STOCKS
Total storage capacity recorded at the LME peaked at 4.35 million square meters at the end of June 2021 after increasing steadily over the course of 2020 in response to an influx of surplus metal generated by the pandemic shutdowns.
LME stocks increased by 1.25 million tonnes in 2020. The 337,000 tonne increase in recorded stocks was eclipsed by a 908,000 tonne jump in so-called virtual stocks.
These are cheaper off-market stored stocks, but with an explicit contractual reference to the LME collateral option. The LME delivery process can be done with the touch of a keyboard, which is why large tonnages of metal can mysteriously appear overnight in official LME inventory figures.
Just as these virtual stocks have grown faster than stocks recorded in 2020, they have also fallen more sharply since the start of 2021. At the end of December, they totaled only 339,941 tonnes, compared to a peak of 2.09 million in February.
The year-on-year decline was 1.54 million tonnes, eclipsing the 665,000 tonne drawdown on recorded stocks.
Virtual inventory is easier to move through the physical supply chain than warrant metal, which must be canceled and may have to queue before being physically loaded. The waiting time for aluminum in Port Klang was 142 days at the end of January for example.
The biggest benefit, however, is that the total tonnage recorded at the LME – in and out of mandate – fell by more than 2.2 million tonnes, or 56%, to 1.73 million tonnes last year. .
This is why LME storage companies have been removing more and more units. Nine more have gone missing since early January, meaning the reduction in storage capacity continues.
SOLD OUT
LME storage has been dominated by one metal – aluminum – for the past decade.
It’s a bigger market than any of the other base metals and aluminum smelters can’t be shut down quickly in response to changes in demand, which is why aluminum stocks soared after the global financial crisis.
They did it again at the start of the COVID-19 crisis, but then everything changed when China, the world’s largest producer, started importing primary aluminum to compensate for smelter cuts linked to the crisis. ‘energy.
LME aluminum stocks fell by 406,000 tonnes last year and are still down 79,000 tonnes so far this year, even after the 126,000 tonne figure earlier this month.
The market was disappointed by the massive influx, probably because it knows that the pool of virtual stocks ready to guarantee is much smaller than it was, totaling only 297,000 tons at the end of December, compared to 1, 58 million a year earlier.
The declines in fictitious stocks were even more dramatic for other metals last year.
Fictitious copper stocks fell by 90% to just 13,000 tons at the end of December. Virtual stocks of nickel fell by 92% to 2,700 tonnes, those of zinc by 81% to 23,500 tonnes and virtual stocks of lead were only 876 tonnes at the end of 2021.
BULL SIGNAL BUT NOT FOR WAREHOUSES
This depletion of the LME’s fictitious stocks and the simultaneous drop in recorded stocks speaks to the extent of the supply gaps that have developed in the metals markets.
What is a bullish signal for prices may be less good news for those storing excess metal.
It should be noted that all base metals in the LME core traded backward, with the cash premium reaching extreme levels in the case of tin and copper at times last year.
Yet even these unprecedented cash bonuses did not attract enough metal to the LME mandate to halt the overall decline in visible stocks. With collateral-ready virtual stocks all but gone in many cases, exchange warehousemen are in direct competition for units with physical buyers, who have paid record premiums to obtain the metal.
Most analysts expect some easing of supply and logistics pressures this year, which could lead to a replenishment of depleted LME stocks.
But the longer-term prognosis is that the world needs more metals such as copper, aluminum and nickel to enable decarbonization.
The ability of producers to supply this additional metal while simultaneously reducing their own carbon emissions seems highly questionable at present.
Supply shortfalls could become the new normal for the Green Revolution, meaning fewer metals are heading to terminal markets such as the LME.
You can see why Glencore decided to shut down its warehousing business. There may be more money to be made by supplying the desired metal to the physical supply chain than to the storage market.
The opinions expressed here are those of the author, columnist for Reuters
(Editing by David Evans)
