LME aluminum inventory
Previously, we saw that Chinese aluminum production has fallen during 2016. Aluminum prices and physical premiums, among other factors, are also impacted by physical stocks. So, it’s important for investors in companies such as Alcoa (AA), Century Aluminum (CENX), and Rio Tinto (RIO) to follow the inventory report.
In this part of the series, we’ll look at the recent trend in the official LME (London Metal Exchange) inventory as well as unreported aluminum stocks.
The above graph shows the trend in the LME aluminum inventory. Inventory levels have been falling after hitting ~5.5 million metric tons in mid-2013. This falling trend has continued in 2016. On a year-to-date basis, the aluminum inventory for LME-registered warehouses has fallen by more than 668,000 metric tons. This includes a 69,400 metric ton decline in August.
Many people think that aluminum inventories have been moving away from LME locations to non-LME locations. However, we don’t have an official estimate. During its 2Q16 earnings presentation, Norsk Hydro (NHYDY) noted that global inventory days stand at ~30 looking at reported aluminum stocks. However, global inventory days increase to ~80 if we include unreported stocks.
According to Norsk Hydro, total global inventory days, including unreported stocks, have come down in 2Q16. However, the company admitted that there’s “high uncertainty regarding the absolute level of unreported volumes.”
Having said that, the projected deficit for 2016 should help clear some of the aluminum glut in the supply chain.
In the next part of the series, we’ll see if the market deficit is impacting physical aluminum premiums.
Investors looking to diversify the risk of investing in a single security can also consider the SPDR S&P Global Natural Resources ETF (GNR). Almost one-fourth of GNR’s holdings are invested in metal companies.