London 18/03/2016 - Aluminium stored in LME-registered sheds in Detroit has fallen to the lowest level since the start of the financial crisis, data showed on Friday.
Detroit aluminium inventories now stand at 262,325 tonnes - the last time they were this low was November 2008. Global LME stocks stand at 2,855,225 tonnes after falling a net 6,900 tonnes.
Additionally, availability has dropped after substantial volume of 102,050 tonnes was freshly cancelled at this location. This has left on-warrant material at just 37,850 tonnes, the lowest since February 2015.
This phenomenon is not limited to Detroit. Since the start of the week a whopping 260,000 tonnes have been put back into the queue, mostly in Detroit and Vlissingen, lifting total global cancelled warrants to 803,125 tonnes.
Still, the increase in cancelled warrants was expected, market participants have said - the backwardation in aluminium spreads had collapsed and returned to a contango, with the benchmark cash/threes last at $22.50.
Since the collapse, there are no longer any dominant holders, according to today’s data - at the start of the week there had been one holder across all three reported positions in the 50-79 percent bracket.
As well, the LME's new regulation on queue-based rent caps (QBRC) will come into force on May 1; these are expected to incentivise further cancellations because metal held in a queue will now benefit from cheaper or free rent, depending on the time it takes for the metal to leave sheds.
Since the financial crisis in 2008 and the corresponding low-interest rate environment, aluminium has been used heavily in financing deals whereby the large availability of metal resulted in a healthy contango along the forward curve.
This contango made it profitable to tie metal up in financing deals with banks and store metal until the deal either expired or was extended.
Since non-LME warehousing rental fees are often considerably less than on-exchange fees, participants started to move material off-exchange to increase their profit margins.
This resulted in waiting times lengthening at warehouses, particularly those in Detroit and Vlissingen, enabling warehouse owners to profit on the rent charged on the metals held in ever-increasing queues.
Following complaints from some quarters and multiple consultations, the LME decided to alter its load-in/load-out rates to speed up the time it took for metal to be exit warehouses. But, for warehousers at least, the most controversial alteration is QBRC.
It is this regulation, participants said, that has seen cancelled warrants spike in these two locations this week, with more material also expected to move off-exchange.
While the opacity of off-exchange inventories make it impossible to ascertain accurately how much global aluminium is available, earlier this week Macquarie estimated the total at 15 million tonnes.
(Editing by Mark Shaw)