High LME aluminium stocks may squeeze storage space

By Karen Norton LONDON, Feb 5 (Reuters) - Stocks of aluminium held in London Metal Exchange (LME) warehouses have risen to historic peaks almost daily and, with no let-up in sight, space to store it and other metals in Asia and the United States may be hard to find. Locations in those areas might come under pressure due to a lack of warehouses or because of rules on location. The outside storage of aluminium in compounds, as was the case in the early 1990s, no longer appears an option. "There is pressure from producers and traders on the system for more space," said Charles Bucknall, managing director of NEMS Ltd, an LME-approved warehouse company with operations in Europe, Asia and the United States. "The LME is not very keen on using compounds, but if warehouse space is not available, then at some stage something has got to give," he said, adding that the LME might have to relax its rules on how far from a port material can be stored. LME aluminium inventories surpassed their June 1994 historic high last month and have continued to rise as the global economic downturn hits the construction and transport sectors. Stocks were almost 2.9 million tonnes on Thursday, having risen by over half a million since the end of 2008 alone. Some analysts fear they could reach 4.0 million tonnes this year. "If stocks continue to come in as much as they are, the chances are there will be certain areas which will have severe space constraints," one warehousing source said. "If we don't have any space, we don't have it for aluminium, copper, nickel, lead or zinc," he added. Despite predicted tightness in the United States and Singapore, no-one expected a crisis, pointing to the expansion of warehouse numbers and locations. Inventories in Singapore, Baltimore and Detroit are all around 400,000 tonnes, in Rotterdam they are close to 500,000. "There might be a few tight spots, but there are others that are adding tremendous capacity," said a Midwest warehouse executive. Traders said warehouses would always offer alternative locations and cash incentives to customers. LME CONFIDENT Meanwhile, the LME is confident it can keep up with demand. "We are always available as delivery of last resort and will continue to list more warehouses as the need arises," said spokeswoman Emma Davey. She said 20 to 30 new warehouses had been listed so far this year, with another 70 outstanding, adding that the Exchange would not consider outside storage of aluminium. In the early 1990s some aluminium in Rotterdam, swollen by the break-up of the former Soviet Union and a surge in exports from there, had to be stored outside LME warehouses. Concerns were expressed at the time about potential damage to the metal from this practice, but the LME pointed out that aluminium does not oxidise. The security of the metal would be a greater concern, sources said. While warehousers agreed the LME would not allow outside storage they said it might have to relax its rules in other ways. "There is only a finite space which is available and appropriate for the regime. Relaxing the distance from the quayside pulls more warehouses into play...." Bucknall said. But he also made the point that in the recent boom a lot of shed space previously used to store metal had been upgraded, meaning landlords would not be keen to receive lower rent. "Metals only require a good floor and roof, hardly the quality of space needed to store foodstuffs or computer parts used today," he added. Davey said the LME had no plans to change current procedures. The massive jump in LME aluminium stocks has been exacerbated by the placement on warrant of material previously tied up in deals which no longer make financial sense. Most of that flow appears to have run its course, but not all. A physical trader in Singapore said a large part of the material there and in Johor in Malaysia was off-warrant but expected it to find its way into LME warehouses over time. The perception is that rising LME stocks spell boom times for warehouses, but most insist this is not the whole story. For the year beginning April 1., the cost of storing aluminium in LME-approved warehouses will rise on average to 38 U.S. cents per tonne per day from around 35 cents. But the LME can be a small portion of their business and other parts are suffering in the current economic climate. "LME business is the cream on the milk. The milk is our physical business and that has virtually ground to a halt," said one. (Additional reporting by Carole Vaporean in New York and Nick Trevethan in Singapore) (Edited by Keiron Henderson)