Column: Scarcity is changing the LME warehousing game


LONDON, Aug 12 (Reuters) – The London Metal Exchange’s (LME) global warehousing network is shrinking fast.

Over the past year, the number of registered storage units has fallen from 604 to 472, the lowest in at least a decade, with the collective decline reflecting the dwindling reservoir of metal to be stored.

Total LME stocks, including so-called virtual stocks stored off-market, stood at 1.031 million tonnes at the end of June. That was down 700,000 tonnes from early January and 2.24 million tonnes less than June 2021.

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Scarcity in the physical supply chain has drained the metal from the exchange, affecting rental income from storage providers.

Less metal, especially aluminum, also means fewer opportunities to take advantage of the LME’s arcane loading rules.

Glencore’s (GLEN.L) sale of its Access World storage arm this year marked the latest departure for trading houses and banks that entered the LME storage business in the early 2010s.

The buyer, Malaysian Infinity Logistics and Transport (1442.HK), illustrates the change in ownership as LME warehousing returns to those working in warehousing rather than trading.

Total number of LME registered warehouse units and total inventory


Goldman Sachs (GS.N) led the charge in LME warehousing with its purchase of Metro International in 2010. The bank was betting that the global financial crisis would generate a tsunami of unsold aluminum.

It made. Aluminum stocks recorded on the LME rose from 1.17 million tonnes in August 2008, just before the credit storm hit, to 4.6 million tonnes a year later.

What the physical supply chain didn’t want was a windfall for the financial sector, as the excess metal created a super-contango that turned the prosaic business of equity finance into a major revenue stream. .

With the profitability of the trade dependent on the cost of storage, financiers had every incentive to move aluminum to cheaper off-market leasing deals.

This led to the infamous queues, first in Detroit and then at the Dutch port of Vlissingen, as the LME’s restrictive loading rates – designed for low-tonnage industrial users and not high-volume financial players – caused massive aluminum traffic jams initially.

Operators could use revenue from the metal trapped in queues to attract new flows, creating a merry-go-round effect and further increasing physical bounties.

The scandal has angered some of the world’s biggest aluminum users, sparked a confrontation with US regulators and forced the LME to embark on a long campaign to limit the queuing model.

The aluminum carousel continues to run muted at Port Klang in Malaysia, where ISTIM has had a loading queue at the end of every month since February 2021. The wait for aluminum was 109 days end June.

Total capacity of LME warehouses and quarterly variation


Port Klang still holds the largest amount of aluminum in the LME warehouse network. Stocks, both recorded and fictitious, amounted to 397,000 tonnes at the end of June, or 60% of the total trade-related aluminum stock.

But that’s a far cry from the 1.7 million tonnes that sat in the city’s warehouses as recently as February last year.

The aluminum carousel is also slowing down due to a lack of fresh supplies. Port Klang had 82,175 tonnes placed under warrant in the first quarter of the year. The inflow decreased to 14,825 tons in the second quarter and has totaled 10,450 tons since the beginning of July.

The amount of live tonnage that could run the roundabout at the port has fallen to 80,175 tonnes from 430,000 at the start of the year.

It is therefore not surprising that storage capacity at Port Klang has been sharply reduced by almost all operators, with the number of registered LME hangars falling from 130 a year ago to 51, by far the biggest change by location. Among the major port operators, Access World cut 32 units, ISTIM 18 and P.Global Services 16.

Total storage capacity listed by the LME at Port Klang fell to 472,000 square meters at the end of June, from 770,000 a year earlier, representing almost half of the 660,000 square meters of shrinkage in the entire system .

Johor, also in Malaysia, saw the second-largest reduction of 87,000 square meters, closely followed by Rotterdam, where capacity fell by 86,000 square meters.

Dutch neighbor Vlissingen lost another 49,000 with a registered capacity now of 67,500 square meters. At the height of the queue mania in 2016, it had 560,000 square meters of LME storage capacity.

Only one LME cargo delivery site – Owensboro in the US – has seen capacity growth in the past year and it has been just 4,000 square meters thanks to a relisting by Grafton Warehouse Services.

Grafton was the only company among the 27 registered LME warehouse operators to increase the number of units in the past 12 months.

LME warehouse workers per unit and change of unit


When Goldman demonstrated the money-making potential of excess aluminum in Detroit, others were quick to join the party.

Glencore (GLEN.L), JPMorgan (JPM.N), Trafigura, Noble Group (NOBG.SI), Mercuria (7190.T) and Brazil’s BTG Pactual (BPAC3.SA) have all been involved in the storage business LME at some point. in the 2010s.

At the height of this wave of investment in July 2014, warehouses directly controlled by or linked to metal trading entities accounted for 62% of the LME network. The ratio has since fallen to 6%.

Goldman, first in, was first out in 2014 after finding itself caught in the eye of the media storm that swept through Detroit’s loading queues.

Some tried to recreate the queue model but failed and left the LME warehouse. One went horribly wrong, with the LME delisting Worldwide Warehouse Solutions, then owned by Singapore’s Golden Dragon Resources, due to a financial meltdown in 2018.

Markets are again changing the warehousing landscape at the LME.

The boom that attracted Wall Street heavyweights and commodity traders was based on excess metal that had to be stored and financed in a logistics system that was not designed to deal with operators playing for financial stakes as important.

Warehousing became the tail that rocked the global aluminum market, hardwired into the shifting flows of metal between registered storage and parallel storage and for a time into physical premiums.

This time of plenty has turned into a time of scarcity, and LME warehousing is once again becoming the purely logistical facilitator it was before Goldman saw gold in the mountains of aluminum.

The opinions expressed here are those of the author, columnist for Reuters.

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Editing by David Goodman

Our standards: The Thomson Reuters Trust Principles.

The opinions expressed are those of the author. They do not reflect the views of Reuters News, which is committed to integrity, independence and freedom from bias by principles of trust.


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