London 20/05/2016 - The London Metal Exchange "anticipated" a further fall in aluminium stocks in listed warehouses this year after the introduction of queue-based rent capping (QBRC) and does not feel this will affect price discovery, it said.
With metal moving into cheaper off-warrant storage, global LME-listed aluminium stocks have dropped close to 2.5 million tonnes, their lowest since 2009 from just below three million tonnes at the start of the year, four million tonnes last year and more than five million tonnes in 2014.
"It made sense to weather that short-term impact to have that protection of QBRC and we expect those queues to fall again," LME head of business development Matt Chamberlain said at an industry update earlier this week.
Significant moves have continued this week - according to today's LME data, cancelled warrants jumped 68,850 tonnes to 1,131,500 tonnes, with fresh cancellations of 74,425 tonnes in Vlissingen - cancelled warrants here now stand at 811,325 tonnes.
More than 800,000 tonnes have been cancelled in this location since mid-March, lifting the queue there to more than 300 calendar days - it had dropped below 200 days last month.
Vlissingen stocks dropped a net 4,050 tonnes to 1,034,275 tonnes, leaving 222,950 tonnes of available or on-warrant material.
Vlissingen held 1,249,050 tonnes at the start of the year, of which 725,875 tonnes were cancelled. A year ago - before new rules were implemented - it held 1,816,050 tonnes, of which 883,400 tonnes were metal booked for removal.
"In Vlissingen the introduction of QBRC has meant people have said 'I have better access to my metal. I can go get that metal out of the warehouse more cheaply' and they will therefore request access to that metal," Chamberlain said.
Warehouse operators warned during the consultation period that QBRC - under which the rent is halved on any metal held in queues of more than 30 more and free of rent after 50 days - would trigger a
a spike in metal holders taking advantage of the cheaper rents.
For aluminium in particular, there are fears that QBRC will lead to backwardations in an oversupplied market, a collapse in premiums, even longer queues in the short term and higher warehousing costs, making LME storage business unattractive.
Indeed, aluminium's nearby spreads are more regularly backwardated - the benchmark cash/threes was last in a contango of $12, having flared out to a backwardation of $25 early in March. There is a small pocket of tightness on the August/3-mth date, backwardated at $0.25.
The Dec 16/Dec 17 date, which is largely used in financing deals, has also softened to a contango of just $37 - less than the full-financing cost needed of at least $50.
"As the supply of deliverable warrants has fallen and become restricted, we have seen more volatility around the front end of the curve and one explanation that people suggest for that is the impact of warehouse reform driving metal out of those queued warehouses," Chamberlain said.
As financing becomes unprofitable on the LME, some metal owners may prefer to store metal off-exchange where fees are considerably lower.
To stop spread squeezes the exchange will introduce increased accountability levels for dominant holders of metal as of July 4.
The accountability levels apply to any member and/or client trading LME contracts and will apply to positions held at the end of day - for high-grade aluminium, single-prompt accountability and all-prompt accountability is set at 15,000 lots.
LME warrant holding data showed that there no large warrant holders at present.
(Editing by Mark Shaw)