* LME stocks 20,375 T from setting new peak over 5.1 mln
* Market swamped with surplus, producers destock at year-end
* Traders estimate 6-7 mln T more metal in non-LME
By Melanie Burton and Eric Onstad
SINGAPORE/LONDON, Nov 16 Aluminium stocks on the
London Metal Exchange (LME) are poised to hit another all-time
record above five million tonnes as soon as next week in a
market swamped by a structural surplus.
Stocks are also likely to keep touching fresh records
throughout next year as no end is in sight to chronic
oversupply, analysts and traders said.
Stocks have ballooned since the 2008 financial crisis as
banks spotted money making opportunities from financing deals
that effectively locked material in warehouses and as top
producer China kept churning out metal as it subsidised
loss-making plants to save jobs.
"The market's still generating surpluses, so the stocks have
got to go somewhere. Sometimes it goes into unreported stocks
and sometimes it ends up on the LME," said analyst Stephen
Briggs at BNP Paribas in London.
Stocks in LME registered warehouses of the
light-gray metal used in packaging and transport rose on Friday
to 5,105,425 tonnes, just 20,375 tonnes short of the previous
record set on Feb. 20.
The LME, the world's largest base metals marketplace,
oversees a global network of such warehouses, which are meant in
part to ensure that industrial consumers can take delivery of
stock against the exchange's contracts if necessary - a
so-called market of last resort.
Some users complain that the LME is not ensuring this role
because its regulations allow long backlogs at warehouses,
forcing consumers to wait many months to access metal.
The LME announced proposed revised rules on Thursday aimed
at relieving some of the logjams, but analysts said they would
do little to reduce the long queues.
"We're in a surplus and we'll continue to be a surplus for
the foreseeable future, especially with new production coming on
next year," said a metal trader in London who specialises in
Flows into warehouses were typically stronger at the end of
the year as producers tidy up their own inventories, he added.
"You're probably seeing more material becoming available in
the fourth quarter as the producers destock and clear the decks
for year end."
A steady drip-feed of metal from the world's top producer,
Russia's RUSAL, into Glencore International
Dutch warehouses in Vlissingen was also inflating supply,
In April, the companies signed a seven-year deal for RUSAL
to supply 1.4 million tonnes this year alone.
Rivalries between warehouse companies to attract metal to
earn lucrative storage fees has also been behind some of the
fluctuations in LME stocks, Briggs said.
"You see these waves of stocks going up and then stocks
going down and I think that largely reflects material being in
transit from one LME warehouse to another as these battles carry
on. Now, we happen to be at a point now where stuff is coming
in," Briggs said.
In financing deals, traders simultaneously buy aluminium
and sell it forward for a profit, striking a deal with cheap
funding to store it cheaply in the interim.
Some investors may be delaying agreeing such arrangements as
tightness has hit nearby parts of the forward curve, reducing
returns for some financing deals, another trader said.
December aluminium has traded higher than January
for the past six weeks, last at $5 and down from a high of $10.
"What the nearby tightness probably will achieve is that you
see less fresh financing deals coming in. At least for the
larger transactions people will rather wait for the new year and
hope that the tightness will ease off," said a Switzerland-based
Most of these financing deals are in non-LME registered
warehouses, where storage costs are cheaper.
Traders estimate another 6-7 million tonnes, not including
producer and consignment stock, has built up over the last four
years outside the LME warehouse system.
In China, which does not have LME warehouses and is largely
self sufficient, commercial stocks of primary aluminium have
doubled this year to around 1 million tonnes.