(The opinions expressed here are those of the author, Andy Home, a columnist for Reuters.)
Glencore’s decision to sell its warehousing and logistics business looks like a well-timed call on the metals storage market.
It bought Access World in 2010 in the wake of the financial crisis, which generated a surge of metal, particularly aluminium, into London Metal Exchange (LME) warehouses.
Total LME inventory of all metals mushroomed from 3.41 million tonnes at the start of 2009 to a peak of 7.75 million in June 2013.
Glencore wasn’t alone in seeing the opportunities created by the metal glut. Goldman Sachs had already snapped up another LME warehousing company – Metro – and others would follow.
Fast forward to 2022, however, and the outlook for LME warehousing companies is very different.
Exchange stocks have been draining away as pandemic demand recovery collides with disrupted supply chains across the base metals spectrum.
Deficit markets have sucked metal out of the LME system and warehousers have responded by aggressively cutting storage capacity.
Total LME registered storage space shrank by 290,500 square metres to 4.06 million square metres over the second half of 2021, reversing five consecutive quarters of expansion.
The LME’s delisting of the German port of Bremen as a good delivery location accounted for 29,900 square metres of the decline but there were bigger falls at Rotterdam (45,090 square metres) and the Malaysian ports of Johor (50,583) and Port Klang (121,783).
The latter has emerged as the largest LME storage hub for aluminium in recent years with registered warehouse capacity growing by 85% between June 2019 and June 2021, at which stage it had overtaken Rotterdam to claim the number one spot.
It’s probably no coincidence that Infinity Logistics, which has just bought Access World for $176.7 million, is a Malaysian company.
But it means Port Klang is particularly exposed to the broader trend of declining exchange-registered stocks.
Total LME registered storage capacity peaked at 4.35 million square metres at the end of June 2021 after expanding steadily over 2020 in response to an influx of surplus metal generated by pandemic lockdowns.
LME stocks rose by 1.25 million tonnes in 2020. The 337,000-tonne increase in registered inventory was dwarfed by a 908,000-tonne jump in so-called shadow stocks.
These are stocks sitting in cheaper off-market storage but with explicit contractual reference to the option of LME warranting. The LME delivery process can be effected at the stroke of a keyboard, which is why large tonnages of metal can mysteriously appear overnight in the LME’s official stock figures.
Just as such shadow stocks rose faster than registered stocks in 2020, so have they fallen harder since the start of 2021. By the end of December they totalled just 339,941 tonnes, down from a February peak of 2.09 million.
The year-on-year decline was 1.54 million tonnes, eclipsing the 665,000-tonne draw on registered stocks.
Shadow stocks are easier to move into the physical supply chain than on-warrant metal, which has to be cancelled and may have to sit in a queue before being physically loaded out. The waiting time for aluminium at Port Klang was 142 days at the end of January for example.
The bigger takeaway, however, is that total LME registered tonnage – on-warrant and off-warrant – slumped by over 2.2 million tonnes, or 56%, to 1.73 million tonnes last year.
Which is why LME warehousing companies have been delisting ever more units. Another nine have gone since the start of January, meaning the shrinkage in storage capacity is continuing.
LME storage has been dominated by one metal – aluminium – for the last decade.
It’s a bigger market than any of the other base metals and aluminium smelters can’t be turned off quickly in response to changes in demand, which is why aluminium stocks mushroomed to such an extent after the global finiancial crisis.
They did so again early in the covid-19 crisis but then everything changed as China, the world’s largest producer, started importing primary aluminium to compensate for energy-driven smelter curtailments
LME aluminium stocks fell by 406,000 tonnes last year and are down by another 79,000 tonnes so far this year even after the mass warranting of 126,000 tonnes earlier this month.
The market was underwhelmed by the mass arrival, probably because it knows the pool of ready-to-warrant shadow stocks is much smaller than it was, totalling just 297,000 tonnes at the end of December, compared with 1.58 million a year earlier.
Declines in shadow stocks were even more dramatic in the other metals last year.
Copper shadow stocks shrank by 90% to just 13,000 tonnes at the end of December. Shadow stocks of nickel fell by 92% to 2,700 tonnes, those of zinc by 81% to 23,500 tonnes and shadow lead stocks were a paltry 876 tonnes at the close of 2021.
This clear-out of LME shadow stocks and the simultaneous decline in registered inventory attests to the scale of the supply gaps that have opened up across the metals markets.
What is a bull signal for prices may be less good news for those in the business of storing excess metal.
It’s worth noting that all the core LME base metals have been trading in backwardation, the cash premium spiking to extreme levels in the case of tin and copper at times last year.
Yet even these unprecedented cash premiums haven’t attracted enough metal onto LME warrant to halt the overall slide in visible stocks. With ready-to-warrant shadow stocks almost gone in many cases, exchange warehousers are directly competing for units with physical buyers, who have been paying up record premiums to get metal.
Most analysts expect some easing of supply and logistics pressures this year, which may see some replenishment of depleted LME inventories.
But the longer-term prognosis is that the world needs more metals such as copper, aluminium and nickel to enable decarbonisation.
Producers’ ability to deliver that extra metal while simultaneously cutting their own carbon emissions looks highly questionable right now.
Supply deficits could become the new norm of the green revolution, which means less metal heading to terminal markets such as the LME.
You can see why Glencore has decided to call time on its warehousing business. There may be more money to be made in supplying sought-after metal to the physical supply chain than the storage market.
(Editing by David Evans)
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