Stocks of primary aluminium registered with the world’s big three exchanges—London Metal Exchange (LME), NYMEX and the Shanghai Futures Exchange (SHFE)—fell by 10,626t to 864,887t over the course of June.
Asian Stocks Neutral
Exchange stocks had fallen in the previous two months but June brought a change of pattern. The previous driver of falling stocks had been the SHFE, where registered tonnage dived from close to 100,000t in early March to 24,520t at the end of May. That’s a low level and unsurprisingly the downtrend has bottomed out around there, June bringing only a small 565t further fall to 23,955t.
The severity of the stocks fall in Shanghai has surprised several commentators in light of still-soaring production growth and a sharp downturn in exports of primary metal.
However, local demand for primary metal has been booming as local players rush to export “product” (some of which is only first-stage conversion of primary) to capitalise on the tax differential left when the authorities hiked the export tax on primary to 15% at the start of this year.
That said, we are aware of suggestions that the Shanghai stocks figures may not be capturing a rise in off-market stocks.
Either way, the key question now is what will happen to China’s internal market dynamics after Beijing wiped out tax export rebates on just about every form of aluminium product at the start of this month.
That will also have repercussions for the Asian market as a whole. After three consecutive months of rises, stocks registered with LME warehouses in the region actually fell last month, albeit by a highly modest 900t.
They could fall further if China’s latest adjustment to its export tax regime succeeds in cutting off the flow of “product” to the likes of South Korea. The physical discount for Chinese metal in non-ingot form has started contracting as South Korean buyers fret about the impact of the latest tax measures. There are also reports of increased demand for non-Chinese metal in the country, which may feed through into LME warehouse stocks in the country.
European Squeeze
The primary driver of the overall decline in LME stocks last month was Europe, where both exchange stocks and producer stocks have been slowly squeezed for some time.
That’s been most evident on the periphery of Europe. UK LME-registered stocks were exhausted last month, marking the end of a long-running downtrend—hard to believe now but they totalled over 300,000t at the beginning of 2004.
Those in Sweden continue to be whittled away, falling another 400t to 7,200t in June. Those in Italy (actually Trieste) were all cancelled at the end of May and that metal has been trickling out of warehouse ever since. Registered tonnage fell by 7,800t last month, leaving 9,925t, all of it cancelled.
LME stocks in the rest of Europe fell by 4,100t with the only inflow coming in the form of the 2,000t that were warranted in the middle of the month at Bilbao in Spain.
As the chart below shows, European exchange stocks are steadily declining, meaning the bulk of the tonnage in the LME system is split between Asian and US locations.
US Build
LME-registered stocks in the US continue to build. They rose by a net 4,125t over the course of June and ended that month showing a year-to-date build of 121,550t.
Movement has been consistently two-way at LME locations but the continued bias to the “in” side reinforces anecdotal evidence that local demand is still soggy and the physical market fairly weak. The US housing slump and a retrenching automotive sector are the two main culprits.
Right now this is purely an LME phenomenon. NYMEX-warranted stocks have fallen by 4,080t to a low 17,307t over the first half of this year. A similar attrition of off-warrant stocks has also taken place, although that particular downtrend seems to be bottoming out.
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