Gauging aluminum inventories up to 2016
Aluminum inventories in official LME (London Metal Exchange) warehouses have been trending downwards after hitting ~5.5 million metric tons in mid-2013. The graph below shows the falling trend in LME aluminum inventories. Currently, the LME has 2.8 million metric tons of aluminum. Last year, LME aluminum inventories fell by 1.3 million metric tons. But aluminum markets were in a surplus last year—you can define a surplus as production in excess of demand—as they have been for the last decade.
Reading the surplus markets, estimated record tonnage
Let’s look at some estimates. Last year, global (ACWI) aluminum production was 57.9 million metric tons, according to the data compiled by International Aluminum Institute. Alcoa (AA) estimates that global aluminum demand was 57.07 million metric tons in 2015. This should leave markets in a surplus of more than 800,000 metric tons.
In its 3Q15 earnings presentation, Alcoa estimated aluminum markets would hit a record surplus of 551,000 metric tons in 2015. Looking at the surplus, aluminum inventories should have increased somewhere in the supply chain last year. However, let alone an increase in inventory, we saw a decline of 1.3 million metric tons in official LME aluminum inventory.
Unofficial stocks and the up-and-coming non-LME ecosystem
Aluminum has been gradually moving away to the non-LME ecosystem over the last few years. Non-LME warehouses typically charge less rent than LME warehouses to store the metal. Furthermore, by storing aluminum in non-LME locations, traders can evade the tough LME warehousing norms.
You can also consider the SPDR S&P Global Natural Resources ETF (GNR) to get a diversified exposure to international natural resources companies. Together, BHP Billiton (BHP) and Rio Tinto (RIO) make up approximately 5.7% of GNR’s total portfolio.
But how much of the inventory buildup has been coming from non-LME locations? We’ll find out in the next part of this series.