* Large tonnages caught up in finance deals, warehouse
* Only 15 percent of LME stocks estimated to be available
* Finance deals spreading from aluminium to nickel, copper
By Eric Onstad
LONDON, Feb 21 The world's warehouses are packed
with ever more metal like copper that industrial users think
they can use if needed, but they could suffer costly surprises:
big financial firms have other plans for the material.
Most of these mountains of metal are increasingly being tied
up in financing deals or locked away by companies such as bank
Goldman Sachs and trader Glencore. The bigger
metals inventories grow, the less is available to make things.
A pattern that first emerged in abundant aluminium and then
zinc is spreading to other metals such as copper and nickel.
It means that if demand picks up in the world's biggest
metal consumer, China, consumers everywhere will be forced to
pay up as they scramble to obtain supplies.
Total inventories of the six major industrial metals in
warehouses monitored by the London Metal Exchange (LME) - also
including lead and tin - have grown by over 10 percent to 7.2
million tonnes since July.
Stocks of benchmark metal copper in sheds
registered by the LME, the world's biggest metals marketplace,
have nearly doubled over the past four months to the highest
levels since November 2011.
Of total LME stocks, however, probably less than 15 percent
are available to consumers, said Wiktor Bielski, head of
commodities research at VTB Capital in London.
"There's over 7 million tonnes of metal on the LME and
that's way higher than we've ever seen, but the actual stocks
position around the world is nowhere near as fluid as the
numbers would suggest," he said.
"When demand starts to pick up, and consumers see those big
warehouse numbers and think 'I can go to the LME and I can get
what I need', they're not going to be able to get it."
CONCENTRATION IN FEW HANDS
The scant availability is due to a combination of extensive
deals that earn cash by locking metals up as a financial
investment and to LME rules that allow backlogs to build up,
earning rents for warehouse owners as metal gathers dust.
Metal stocks have been concentrated in a handful of LME
warehouse locations controlled by big banks and trade houses.
Nearly half of all LME stocks are in only two locations,
Detroit in the United States and Vlissingen in the Netherlands,
and two thirds of inventories are in four cities.
Warehouses in Detroit are largely owned by U.S. bank Goldman
Sachs and those in Vlissingen by trade house Glencore. Other
major metals storage centres are controlled by bank JP Morgan
and trade house Trafigura.
Once fund investors see that consumers are scrambling for
metal and paying ever more to obtain it, they may pile in and
send prices ever higher. This could lead to futures market
prices for nearer delivery exceeding those for some dates
further forward in a pattern known as a backwardation that is
seen as a sign of tight supply.
"If you start to see consumers really being pressured and
you see fund money coming in, that's the mechanism that
Glencore, JP Morgan, Goldman Sachs and Trafigura have been
waiting for," said an industry source who declined to be named.
"Because that's why they've locked the metal up - when the
tightness is really going to come, the backwardations are going
to be flaring and prices are going to be rising."
While none of the six metals are in a backwardation along
the main part of their futures curves, the lack of supply has
squeezed certain months, which analysts say is a modest preview
of what may be in store.
In aluminium, for example, a limited backwardation has
emerged with June at a $20 premium to July.
Analysts estimate about 6 million tonnes of LME stocks are
in financing deals or tied up in warehouse backlogs and physical
supplies have become more difficult to source in recent months.
FINANCING DEALS SPREAD
The deals started in aluminium, where banks found that they
could borrow money at rock-bottom interest rates, buy metal and
immediately sell it at a profit for delivery in one or two years
time, storing it in the meantime.
The deals spread to zinc and have recently started popping
up in nickel and copper, traders said.
"We do see Asian clients looking for nickel, but it's more
for financing than any fundamental pick up in demand. In regards
to the flows were seeing, it's fairly regular," said a trader
who specialises in LME inventories.
In a linked development, LME warehouse backlogs initially
developed in aluminium but now involve most of the metals.
Under LME regulations, big warehouses such as Vlissingen,
which has 1.56 million tonnes of aluminium, are required to
deliver only 3,000 tonnes per day, creating huge log jams.
The waiting period to access aluminium is over 14 months at
Vlissingen and 16 months at Detroit.
Other metals are getting caught up as new deliveries of
copper, lead, and nickel are stashed away in the big warehouse
locations, placing them behind the already long queues.
Vlissingen, for example, has nearly 47,000 tonnes of lead
and about 10,000 tonnes each of copper and nickel.
The LME, bought last year by Hong Kong Exchanges and
Clearing, will require warehouses starting in April,
to deliver 500 tonnes a day of other metals trapped behind
queues. Traders say this will have only a modest impact.
"I think that the overall profit dynamic is evolving...
certainly the profitability of warehousing remains quite strong
and I suspect that is increasingly the driver for queue builds
in whatever metals and in whatever warehouse," said Deutsche
Bank analyst Daniel Brebner.
The backlogs have sent some premiums, which consumers pay on
top of LME prices to get quick deliveries, rocketing to record
levels as buyers hunt for accessible supply from outside the LME
system, which is meant to be a reliable fall-back source.
"Whereas the LME still bills itself as the market of last
resort, what you're seeing is all the physical activity is being
done away from the exchange," the stocks trader said.
"People are very much paying through the nose for
just-in-time deliveries instead of relying on the LME stocks."