Aluminum settles in warehouses

Inventories of aluminum in the warehouses of the LME stock exchange in October rose by almost 80% after a continuous decline during the summer. Some market participants attribute this to the risks of sanctions against Rusal, which is why consumers do not want to receive Russian metal and sell it on the exchange. However, according to other data, the increase in stocks in October was provided mainly by metal of non-Russian origin and may be associated with a general decline in demand from industry. According to analysts, the second explanation is more likely, while the volume of reserves cannot yet be called significant.

Inventories of primary aluminum in the warehouses of the London Metal Exchange (LME) over the past month increased by 77%, to 584 thousand tons, follows from the LME data. The growth compared to August, when the 32-year minimum of reserves was registered, is 100%.

Inventory growth was noted by Argus in its October metals review. During the week from October 17 to 23, more than 100 thousand tons of metal fell into warehouses, which made it possible to return stocks to the level of April. Market participants, writes Argus, differed in their assessments of what is happening. Some believe that the surge may be due to the fact that Western consumers avoid buying Russian aluminum.

In October, the global aluminum market was frightened by news of possible sanctions against Russian metal.

First, the LME has begun consultations to ban the supply of aluminum, copper and nickel from Russia to its warehouses. This ban, if any, does not directly affect the activities of Rusal, since large metallurgical companies, as a rule, sell their products under long-term contracts directly to end consumers, and the surplus to traders. Rusal did not provide comments.

Second, Bloomberg reported in October that the US administration was considering an embargo on Russian aluminum or sanctions against Rusal. At the same time, European business associations opposed any restrictions on Russian aluminum, as this would jeopardize the work of thousands of European companies. In 2018, the imposition of US sanctions against Rusal caused a 29% increase in aluminum prices.

The LME does not share information about the origin of the metal in stocks. Most of the aluminum entering LME’s warehouses lately comes from India or the Middle East, according to consulting company Harbor Aluminum. According to her estimates, Russian-made metal is less than 10% of the volume delivered in October, or 25,000 tons. It is this volume that is in stock in South Korea’s Kwangyang. According to Reuters, a Glencore trader delivered Russian aluminum there in October. This volume remains unsold to this day. Rusal has a long-term contract with Glencore for the supply of 6.9 million tons of aluminum. Of these, 344.7 thousand tons were to be delivered in 2020, and about 1.6 million tons – annually from 2021 to 2024. On October 28, Reuters reported that Glencore would not abandon Rusal’s aluminum in 2023.

Other market participants believe that the reason for the increase in stocks in the disappointing macroeconomic outlook. Because of this, buyers under long-term contracts and traders sell part of the volumes on the exchange, as they expect a further decrease in demand. Since January, the exchange price for aluminum has decreased by 25% (see chart).

Alfa Bank’s Boris Krasnozhenov believes that the 600,000 ton inventory is not significant, given global primary aluminum consumption of over 65 million metric tons a year. According to him, in the past decade, LME reserves sometimes reached 8 million tons. “In general, the growth of LME stocks may indicate a weakening in demand for the metal,” the analyst concludes.

Evgeny Zainullin