LME Aluminum Inventory Falls Even as On-Warrant Stocks Climb



London Metal Exchange aluminum inventory

Previously in this series, we discussed the falling trend in aluminum prices as well as physical premiums. Now, we’ll analyze how aluminum inventories moved in September. Aluminum inventory is a key indicator that investors in companies including Alcoa (AA), Century Aluminum (CENX), Norsk Hydro (NHYDY), and Rio Tinto (RIO) should track. Currently, Alcoa forms 2.54% of the Materials Select Sector ETF (XLB).


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Trending downward

The above chart shows the trend in the London Metal Exchange (or LME) aluminum inventory. Inventory levels have been falling after hitting ~5.5 million metric tons in mid-2013. The falling trend in aluminum inventory has continued in September as well.

The decrease in LME aluminum inventories implies that metal has essentially moved out of LME warehouses either to end users or to non-LME-registered warehouses. There have been concerns that a lot of aluminum is flowing to non-LME-registered warehouses because they charge less rent.

Movement of the metal to end buyers is a good sign for the aluminum industry. However, if the metal is moving to another warehouse, it’s basically an inventory reshuffling exercise. Unfortunately, we don’t have any data as to where metal goes from LME warehouses. We also don’t have any official data regarding aluminum inventory with non-LME registered warehouses.

On-warrant stocks climb

However, the on-warrant aluminum inventory has risen in September. All metal that enters LME warehouses is on warrant. The warrants are canceled when the bearer of these warrants requests the physical delivery. At that point, the warrants aren’t available for trading. It’s important to note that the inventory levels in warehouses aren’t affected by canceled warrants. The inventory levels are affected only by the physical movement of the metal.

The increase in on-warrant stocks basically means that there is more metal available for trading, which can be later booked for fresh delivery.

In the next part, we’ll look at how Chinese aluminum exports are currently playing out.


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