LME Aluminum Stocks Jump Most in a Year as Financing Continues

Aluminum inventories tracked by the London Metal Exchange jumped the most in more than a year, following a gain in zinc stockpiles, amid continued appetite to use industrial metals in so-called financing transactions.

Stocks of aluminum rose 1.5 percent, the most since Sept. 13, 2012, to 5.42 million metric tons, daily exchange data showed today. Zinc inventories had this year’s third-biggest increase yesterday, climbing back above 1 million tons with the help of a 12 percent jump in New Orleans warehouses.

As much as 80 percent of stockpiled LME aluminum and 60 percent of zinc inventories may be tied to financing transactions and unavailable to consumers, according to Societe Generale SA. Investors use the transactions to capitalize on markets in contango, when prices increase for later deliveries.

“If you have metal as a bank or trading house and you can’t easily find a customer, it’s simply a no-brainer to put it into financing deals,” Robin Bhar, an analyst at Societe Generale in London, said by phone today. A sizable delivery at a storage point usually signals a financing transaction involving metal already held there, he said.

LME aluminum for immediate delivery settled at a $47-a-ton discount to the contract for delivery in three months yesterday. The gap reached $50.65 in August, the widest since November 2008, and cash zinc’s discount to the three-month contract expanded to the broadest since October 2008 in the same month.

Borrowing Costs

Financing accords typically involve buying metal for nearby delivery while making a forward sale to benefit from a contango. The spread, favorable rent charges and low borrowing costs help boost the transactions’ profitability. Agreements that lock up metal for three to six months are now more “popular” than those lasting longer, according to Societe Generale.

“Generally we should see a pickup in demand in the fourth quarter,” Bhar said. “Until that happens, financial demand will be bigger than industrial demand.”

New Orleans is the biggest global repository for LME stocks of zinc, used to rust-proof steel, and the Dutch port city of Vlissingen holds the most aluminum. Inventories of the lightweight metal in Vlissingen gained 4.3 percent today to 2.09 million tons, the highest level since at least January 1999, according to data compiled by Bloomberg.

Vlissingen is one of five locations characterized by lengthy wait times to withdraw metals from warehouses. The LME, which oversees more than 700 sites, has proposed obliging warehouses with waits exceeding 100 days to ship out more metal than they take in. The change will take effect April 1 if it’s approved this month at an LME board meeting.

World Stocks

While the proposal may permit more aluminum to leave LME warehouses, financing accords may still prevent supplies from reaching industrial consumers, according to Wood Mackenzie Ltd. The Edinburgh-based researcher says global inventories, including those tracked by the LME, are about 14 million tons.

“Substantial stocks exist outside the exchange warehouses,” said Nic Brown, head of commodity research at Natixis SA in London. “Once the new LME rules on delivery-out rates are applied, a greater proportion of stocks are likely to accumulate outside the system in future.”

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