The ongoing fall in London Metal Exchange aluminum stocks -- which have hit their lowest since August 2008 -- could affect regional premiums and spreads, market sources said.
London Metal Exchange aluminum stocks were 1,150,875 mt as of Monday, almost half the 2,300,550 mt on January 13, LME data showed.
Metal moving to cheaper non-LME warehouses from LME warehouses, the US premium encouraging metal withdrawal from Asian and European LME warehouses, and global demand outpacing supply growth were all given as reasons.
Indeed, most global market participants said there was room for a further fall. Some said stocks could hit 1 million mt, or even 500,000 mt -- the level in November 2005.
Those who saw the fall in stocks fall as merely warrant metal moving to another warehouse saw the smallest move lower from current levels.
One producer source said the metal move was spurred by nearby contango spreads, that have been relatively wide over the past three months.
On the other hand, those who saw a global supply deficit as one of the causes of the fall forecast stocks could fall well below 1 million.
The lowest LME stocks in the past 20 years 298,925 mt on December 19, 2000. Russian producer Rusal said this year that global aluminum demand was forecast at 63.1 million mt, while supply 62.4 million mt.
Market participants said the LME stocks figure alone was not a metric for market tightness as there were hidden stocks.
"Stocks should fall quite a lot in order to see actual tightness in the market like 500,000 mt," a European broker said.
Some area-specific impacts could be expected, sources said.
In Europe, there was talk about whether a potential supply tightness could emerge over coming months. European stocks accounted for 47% of total LME stocks as of November 20.
"The European market does not seem like a market on the verge of tightness. Off-warrant stocks are around 1.5 million mt. Metal holders are disciplined now and they keep it. We are months away from a potential tightness," said a trader.
A second trader said there could be supply tightness in the Rotterdam area entering 2018 due to higher Midwest premiums that could attract metal to the US from Europe.
"There is not much duty-unpaid metal coming to Rotterdam. Off-warrant stocks are around 1.2-1.3 million mt...that could equal to 2-3 months of consumption," the trader said.
"Vlissingen stocks are disappearing which could have an impact on European market and premiums," a European consumer said, adding there was still excess global supply of metal despite winter cuts.
ASIA
In Asia, which has 46% of LME stocks, opinion was similarly divided.
Busan stocks were down to 123,775 mt on November 13, from 411,850 mt on February 24. Some Asia-based traders said that although there was no immediate supply tightness due to availability of non-warrant stocks, metal may not be there when people start looking.
But a lack of transparency in the metal outflow from LME warehouses made it difficult to analyze. Some sources said up to 50,000 mt had moved to the US from Asia, while others said the volume was smaller.
In the past month, Asian consumers seeking origin-specific metal, such as Australian metal that is tax-free in some Asian countries, were paying $5-$10/mt more than traders buying any aluminum meeting P1020/P1020A specifications.
While one Taiwan consumer bought Australian metal at $98-$99/mt CIF Taiwan, one South Korean trader bid $70-$80/mt CIF Busan for any origin.
Many sources said LME stocks move do not reflect the real supply and demand balance and would not directly impact LME prices or premiums.
"If you think about it, 1 million mt stocks are only several days of global consumption. But I do not see end-users reaching out and premiums are not shooting up," a producer said.
SPREADS
Spreads would be affected the most, sources said.
"I worry about the spreads the most. My observation of the LME forward curve is that not all players are lending their positions regularly. When some go into action, spreads could turn negative," a Japanese trader said.
Others said backwardated spreads were less likely in the near term.
"The trend is that canceled stocks will get lower over the time but that will be determined on the US premiums. I do not have a strong feeling that spreads will turn negatively, curve is better than it was 12 months ago," the first European trader said.
"Stocks are not the only factor affecting spreads. However, if cancellations continue there could be potentially spread tightness, and then it would be cheap to squeeze, even if it is not intentionally," he said.
A second producer said no matter what the general consensus was, market participants need to be prepared in case backwardations emerged unexpectedly.
