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LME Aluminum Inventories Have Been Sliding since 2013

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Nov. 4 2015, Updated 11:07 p.m. ET

Aluminum inventories

Previously, we explored how aluminum prices and physical premiums might be impacted by Alcoa’s production curtailments. Let’s explore the recent trend in LME (London Metals Exchange) aluminum inventories, a key indicator that investors in companies such as Alcoa (AA), Norsk Hydro (NHYDY), and Rio Tinto (RIO) should track.

Together, Alcoa and Ball Corporation (BLL) form ~4% of the Materials Select Sector SPDR ETF (XLB).

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LME inventory falls

The above chart shows the trend in the 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 October as well. In October, aluminum inventory with LME-registered warehouses has come down by 138,900 metric tons.

On November 2, 2015, LME-registered warehouses had a total aluminum inventory of 3.03 million metric tons, out of which almost 36% were on canceled warrants. All metal that enters LME warehouses is on warrant. The warrants are canceled when the bearer of these warrants requests the physical delivery.

Between October 26–November 2, 2015, canceled warrants surged more than 23%. However, the total aluminum inventory with LME-registered warehouses fell over this period. Generally, falling aluminum inventories and rising canceled warrant stocks support prices.

Where is aluminum headed?

According to Bloomberg, quoting Leon Westgate, an analyst at ICBC Standard Bank, the jump in canceled warrants is “unlikely to be related to real demand.” Westgate added, “With the large tonnages like that, it’s likely to be finance-related. It’s likely to be material moving to an ex-LME location.”

The 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 is basically an exercise in reshuffling the inventory.

In the final part of this series, we’ll explore how the capacity curtailments could help Alcoa.

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