Aluminum Inventories Are Growing Off London Metal Exchange, Trafigura Says

Bloomberg---Aluminum traders may be storing more metal outside warehouses monitored by the London Metal Exchange “so it’s not as apparent as it could be” before the introduction of an exchange-traded fund in the metal, according to Simon Collins, head of refined metals at Trafigura Beheer BV in Lucerne, Switzerland.

Aluminum was considered the most likely industrial metal used to back an exchange-traded product, partly because more of it is produced than other non-ferrous metals combined, a Bloomberg survey in October showed. Global inventories of the metal are at least 10 million metric tons, with about 4.3 million tons in LME-monitored warehouses, Collins said.

“You have more and more inventory, and more financing costs for that inventory, effectively because of the delay in the ETF,” Collins said. “The market is in structural surplus, which means people have been accumulating stocks, primarily off warrant.”

Exchange-traded products backed by copper, nickel and tin were started Dec. 10 on the London Stock Exchange, beating aluminum. United Co. Rusal, the world’s largest aluminum producer, said the possible launch of aluminum exchange-traded funds in 2011 may lock up 2 million to 3 million tons of the metal for “several years,” according to a statement filed to the Hong Kong stock exchange today.

Stockpiles in warehouses monitored by the LME have dropped 334,975 tons this year, or 7.2 percent, to 4.3 million tons as of Dec. 15, according to data from the exchange. Global inventories are probably closer to 10 million or 12 million tons, with the surplus this year at 1.3 million tons, according to Trafigura estimates. Aluminum prices have jumped 4 percent this year.

“There’s a reluctance for people to deliver material to the exchange,” Collins said. Premiums for aluminum, or the extra fee charged over the LME price, are “historically high, so delivering into the exchange means you lose that premium,” he said.

The premium to borrow aluminum for next-day delivery, also known as the tom-next spread, jumped to as high as $20 on Dec. 13, and was at a discount of 40 cents yesterday.