London 04/05/2016 - Availability of aluminium in the LME system jumped on Wednesday, with the move reflecting incentives offered by warehouses to keep hold of material, sources said.
More than 145,000 tonnes of the light metal have been taken out of queues and placed back on warrant since the start of the week
Inventories fell a net 12,350 tonnes this morning to 2,626,725 tonnes but the 100,925-tonne drop in cancelled warrants to 1,071,725 tonnes boosted on warrant - or available - material to 1,555,000 tonnes.
The move was centred on Vlissingen - 96,500 tonnes were removed from the queue there, of which 88,575 tonnes were fresh cancellations. On Tuesday, cancelled warrants fell 44,350 tonnes, again mostly in Vlissingen.
"I cannot understand why someone would rewarrant unless there is an incentive involved," a source close to the matter said.
"It is all rent deals - there is loads of material out there but people are fussy," a warrant trader said.
Before this week's moves, availability had been at its lowest since 2008 after large volumes were booked for removal ahead of the implementation of the LME's queue-based rent caps (QBRC), which came into force at the start of May.
Almost 900,000 tonnes were cancelled in the five weeks from mid-March to April when holders positioned themselves ahead of the rule change
Under QBRC, warehouse companies that fail to deliver out metal held in queues within 30 calendar days would be required to halve the maximum published rent charged to the affected metal owners.
After 50 calendar days, no rent could be charged at all. This would remove any economic benefit for warehouse companies in maintaining a queue.
In a recent consultation with the LME, warehouse operators voiced concerns that the rent cap was open to abuse, fearing that metal owners would take advantage of the new measures by cancelling large tonnages. Indeed, many had warned of mass cancellations around the roll-out of the new rules.
To hold onto the cancelled material, warehousers must "make it attractive to keep metal in and stop the flood of metal away from LME-registered sheds", one trader said.
Spread activity is unlikely to have been responsible for the rewarranting - the tightness along the nearby curve has eased. The benchmark cash/threes was last at $20.25 contango, having been at $1.25 on Friday.
"LME spreads [are] currently unable to offer full carry traders holding material," Triland noted.
Still, a dominant warrant holder remains across all three reported positions in the 30-39 percent bracket.
The three-month price, which looked set to breach $1,700 for the first time since July last year when it peaked at $1,686 on Friday, has come under pressure from the increase in availability - at $1,633 recently, it was unchanged on Tuesday's close.
The metal is starting to look technically overbought, traders said.
"A cooler market outlook and sentiment is being absorbed into prices, yet US dollar weakness is likely to add scale-down support," a trader said.
(Editing by Mark Shaw)