As of April 10, aluminum inventories with London Metal Exchange (or LME) registered warehouses stood at 3.9 metric tonnes (or Mt). This represents a year-to-date decline of 7.5%. LME aluminum inventories peaked at ~5.5 Mt in mid-2013.
Major aluminum producers like Rio Tinto (RIO) and Alcoa (AA) have reduced aluminum production over the last few years. This, along with a pickup in aluminum demand from key end users, has led to aluminum inventories coming down from peak levels.
Aluminum demand from companies like Ford (F) and Boeing (BA) has been strong over the last several quarters. Boeing currently forms 5.17% of the Industrial Select Sector SPDR ETF (XLI). Precision Castparts (PCP), a leading supplier to the aerospace sector, forms 1.5% of XLI.
The above chart shows the trend in LME aluminum inventories. As you can see, the trend is clearly downward. Currently, more than half of aluminum inventory is on cancelled warrants. Aluminum warrants are like a bearer document. Holders of aluminum warrants can take delivery of aluminum from a designated warehouse. All metal that enters the warehouses is on warrant.
The warrants are cancelled when the bearer of warrants requests physical delivery. These warrants are then no longer available for trading. It’s important to note that inventory levels in warehouses are not affected by cancelled warrants. Inventory levels are affected only by physical movement of the metal. A higher percentage of cancelled warrants bodes well for the aluminum industry.
Positive for aluminum industry
The decline in LME aluminum inventory is positive for the aluminum industry. However, several analysts believe that some of this metal is moving to non-LME registered warehouses. In the next part, we’ll look at this in detail.