Global X Aluminum ETF (ALUM)

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ALUM....Banks Sit on Huge Aluminum Stocks, Collect Rent

Warehouse owners, especially those who can hold onto metal for as long as possible, look likely to stay in the money.

Taking Vlissingen, Johor and Detroit out of the system, there's almost no 'free-float' or available aluminum, because the rest of the 3.5 million tons is largely tied up in financing deals, said an analyst who declined to be named.

Banks and trading houses have used aluminum and its storage as a financial tool to boost profits since the global financial crisis sent interest rates to historic lows and left markets awash with a large overhang of unwanted metal.



New fronts are opening up in Europe and Asia in the battle between banks and trading houses to expand their storage hubs for aluminum, a metal meant for use in manufacturing but increasingly viewed as a store of value.

Until recently, the battle was almost exclusively confined to one location, Detroit in the United States, where there is a months-long wait to get aluminum out of warehouses mostly owned by U.S. investment bank Goldman Sachs [GS 117.29 0.12 (+0.1%) ].

The warehouses are part of a global network monitored by the London Metal Exchange (LME), the world's leading marketplace for industrial materials such as aluminum, copper and nickel, which aims to ensure metal traded via its contracts can be delivered reliably.

But over the past few months, industry players have looked on with increasing dismay as supplies built up at LME-registered warehouses in the Dutch port of Vlissingen, and at storage hubs in the Malaysian port of Johor.

Commodity-trader Glencore owns most of the warehouses in Vlissingen, while all the big warehouse operators have LME-listed sheds in the Malaysian state.

Industrial users dislike the queues because not only do they face long delays getting their metal out, they also have to pay rent every day to warehouse owners that drip feed metal out at the minimum rate stipulated by the exchange — currently 1,500 tons a day.

"In Vlissingen there's a six- to seven-month queue, in Johor it's a five- to six-month queue and regardless of which metal you want you still have to wait in the queue," said a trader at a commodities broker.

"The warehouse owners have guaranteed themselves, say, six months' rental income."

Just over half of the total 255,075 tons of aluminum in Johor is waiting to be delivered out, while nearly all the 1.02 million tons of aluminum in Vlissingen has been booked for delivery out of warehouses.

Taking Vlissingen, Johor and Detroit out of the system, there's almost no 'free-float' or available aluminum, because the rest of the 3.5 million tons is largely tied up in financing deals, said an analyst who declined to be named.

In a typical finance deal, a bank or commodity trader loans cheap money to buy nearby aluminum, immediately sells the metal forward at a profit and strikes a cheap rental deal to store the metal in the interim.

For banks that own warehouses, storage costs are extremely low, and money making opportunities plentiful.

The warehouse queues enable them to hold onto metal for as long as possible, while the financing deals — profitable in and of themselves — tie up metal and direct the little free float left over to a limited number of locations.

Financial Tool

Banks and trading houses have used aluminum and its storage as a financial tool to boost profits since the global financial crisis sent interest rates to historic lows and left markets awash with a large overhang of unwanted metal.

Their business model means inventory data — once a reliable guide to world demand for the light, versatile metal used for making cars and packaging — no longer reflect consumption trends.

Complaints by industry about long queues, particularly in Detroit, prompted the LME to raise minimum load-out rates from 1,500 tons a day to 3,000 tons for warehouse operators with stocks of over 900,000 tons in one city, starting in April.

The new rules are expected to help shorten the queues, though they are not expected or even meant to eliminate them.

"The warehouse queues are a reflection of today's macro market dynamics," said LME spokesman Chris Evans.

He added, however, that: "The LME is constantly monitoring the situation to ensure that we respond appropriately."

Warehouse owners, especially those who can hold onto metal for as long as possible, look likely to stay in the money.



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