Bloomberg News

Aluminum Glut at Record as Traders Bet on Price Decline

December 14, 2011

(Updates with Macquarie comment in 11th and 12th paragraphs.)

Dec. 13 (Bloomberg) -- Aluminum stockpiles rose to a record and orders to withdraw metal from warehouses fell to a 15-month low amid speculation traders are adding to bets the commodity will extend its biggest slump since the global recession.

Inventories monitored by the London Metal Exchange rose 2 percent to 4.81 million metric tons today, enough to supply China, the biggest consumer for about three months. Canceled warrants fell 2.6 percent to 152,350 tons, the lowest since September 2010, bourse data show. Open interest, or contracts outstanding, rose 54 percent since mid-July, at a time when prices were falling, suggesting traders were adding to short positions, VTB Capital said in a report yesterday.

Aluminum has dropped 29 percent since reaching a 32-month high in May on mounting concern that slowing economic growth will sap demand for raw materials. Consumption contracted 6 percent in 2009 as economies endured the worst recession since World War II, Morgan Stanley estimates. Supply of the metal, used in everything from cans to jumbo jets, exceeded demand every year since 2007 and will remain in surplus for at least the next five years, the bank predicts.

“People aren’t ordering much, especially in Europe,” said Marco Georgiou, the head of primary aluminum and products at CRU, a London-based researcher. “This quarter is not looking so great, which is why you’ve got all these inflows on the LME.”

Standard & Poor’s

Aluminum for delivery in three months fell 0.7 percent to close at $2,001.50 on the LME. The metal has dropped 19 percent this year. Prices will trade at $2,000 to $2,350 in the next six months, according to the median estimate of 17 analysts surveyed by Bloomberg last month. The Standard & Poor’s GSCI gauge of 24 commodities advanced 2.6 percent this year, led by gasoil, cattle and gold.

Buyers in Europe are paying a premium of $160 a ton for metal for immediate delivery, down from as much as $210 two months ago, a sign of weakening demand, according to CRU, which expects prices as low as $1,900 by the end of this month. The U.S. Midwest premium fell to $7.70 a pound, from as much as $8.20 two months ago, according to CRU.

One unidentified company held a short position in aluminum for December delivery that equals 20 percent to 29 percent of the contract’s open interest, data from the exchange showed today. The position could be a bet on price declines or a hedge against a long position in contracts of other maturities, and first appeared in the data on Nov. 18.

One party held at least 40 percent of aluminum futures expiring in February as of Dec. 9, according to the LME Futures Banding Report.

Dutch Port

Inventories in warehouses monitored by the LME rose almost 13 percent this year. Detroit storage accounts for 26 percent of the total and the Dutch port of Vlissingen 18 percent, LME data show. Stockpiles monitored by the Shanghai Futures Exchange more than doubled since the end of September, to 184,363 tons. Stockpiles not monitored by exchanges may be at least another 5 million tons, Citigroup Inc. estimates.

Some metal previously tied up in financing transactions is now being sold “in response to tightness in the spreads on certain dates and funding (especially in U.S. dollars) for finance drying up,” Macquarie Group Ltd. said in a report yesterday. Financing transactions account for about 70 percent of aluminum stockpiles, according to Citigroup.

No ‘Fresh Surplus’

The increase in inventories “reflects a movement of material from non-reported warehouses into LME warehouses as previously profitable financing deals are unwound,” Macquarie said today in a report. “Our trading contacts suggest that most of this rise does not reflect a fresh surplus between supply and demand.”

About 3 million tons of “financed” metal “is held outside of the LME warehouse system, of which two-thirds is in Europe,” the bank said. Around 100,000 tons a month are “being generated by producers, surplus to consumer requirements, which is also seeking a financing ‘home,’ mainly in Europe,” Macquarie said.

“Year-end liquidity factors are perhaps one reason for the aluminum stock flows, perhaps compounded this time by tighter liquidity” in financial markets, Leon Westgate, an analyst at Standard Bank Plc in London, wrote in a report today.

A financing transaction involves a simultaneous purchase of metal for nearby delivery and a forward sale to take advantage of a market in contango, when contracts with later delivery dates trade at higher prices than nearer-dated metal. Financing costs and expenses for storing metal influence profits on the transactions.

Hedge funds are “very short” on aluminum, said David Wilson, a London-based analyst at Citigroup.

“Any slightly positive news and you’re going to get a rush of short covering, which essentially what’s been happening for the last two months,” Wilson said. “The market is quite vulnerable to good news, but generally people are quite bearish.”

--Editors: Patrick McKiernan, Millie Munshi

To contact the reporters on this story: Agnieszka Troszkiewicz in London at atroszkiewic@bloomberg.net; Maria Kolesnikova in London at mkolesnikova@bloomberg.net

To contact the editor responsible for this story: Claudia Carpenter at ccarpenter2@bloomberg.net


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