Aluminium inflows rise on dollar crunch, poor demand

 

 

Producer metal has become more freely available as consumers have deferred 2012 orders due to Europe's deteriorating outlook, metals industry sources said.

 

 

Chinese demand has been cut by a slowdown hitting its export markets and traders say a squeeze on dollar funding in Europe has also raised the prospects that metals financing deals, at least at the margin, may not be renewed or may come undone.

 

 

"I have heard the inflow is six digits," said one physical trader based in London, referring to the amount of aluminium in tonnes expected to enter LME warehouses.

 

 

Aluminium metal is more easily monetised once it enters the LME system when a paper title or warrant to the metal is issued. These are highly liquid and can quickly be converted to cash.

 

 

"100,000 tonnes of stocks coming in around the December date, that's expected," a trader at a LME ring dealer said.

 

 

Aluminium rent deals became a financial tool of choice in the aftermath of the 2008 crisis, providing a safe way for banks and trading houses to generate income because the paper warrants to LME metal were backed by physical assets.

 

 

A bank or trading house buys aluminium from a producer, agrees to sell at a point in the future at a profit and stores it cheaply until then.

 

 

Such deals have locked up some 80-90 percent of surplus metal, analysts say. Some 4.56 million tonnes sits within LME-monitored warehouses, with a similar amount said to sit outside.

 

 

"If the interbank market is drying up completely and the European banks are trying to run down their balance sheets to reduce their capital requirements, then effectively you have a reduction in credit that might be available for a lot of these financing deals," analyst Nic Brown at Natixis said.

 

 

The funding squeeze has cut European banks' access to the commodity trading currency at a time when many are trying to boost balance sheet capital ahead of Basil III regulations.

 

 

"Some of the French banks have been cutting back on trade finance and their working capital facilities," said the head of a category two non-French LME bank.

 

 

But another said that despite some cuts to credit lines, there was still "plenty of money" for those who required it.

 

 

SPOT METAL SURPLUS

 

 

A global slowdown that has crimped demand from China's export markets has also eaten into the country's requirements for primary metal. China is the world's top metals consumer.

 

 

"Both aluminium and nickel are suffering from the fact they are the two metals most sensitive to a weakening in the global economy in terms of Chinese exports of aluminium products and stainless steel," added Brown.

 

 

"What was solid demand for aluminium in China is slackening significantly and the tightness in the (global) market being caused by the tightness in the Chinese market is all dissipating. You've got weak fundamentals in both aluminium and nickel because of that."

 

 

The gloomy economic outlook has encouraged fabricators to keep trim working inventories and defer 2012 orders, steps which have boosted the availability of spot material, traders said.

 

 

"Fabricators are probably deferring Q4 tonnage if they don't absolutely need it. That is one of the reasons why aluminium is said to be as loose as it is physically right now," added a source at a ring dealing LME member.

 

 

Premiums for physical aluminium in Rotterdam have weakened going into the year-end on a drop in demand.

 

 

As a result, some metal, held outside of exchange systems, should make its way on to the exchange, the market of last resort, where it can be used as collateral for cheaper funding and also be delivered against short market positions.

 

 

"What we would expect to see is people with funding issues not being able to finance, and so we'd expect the contangos to widen," said the head of metals at a category two LME bank.

 

 

"Anyone that is sitting on stock and is short of cash, especially coming up to year end, are going to lend that into the market, and get the cash back ...The problem is now, it's not that easy and there's not that many participants."

 

 

On the LME, aluminium's forward curve has begun to ease but is still pointing to a shortfall of nearby supply and a premium that may help attract stocks to exchange, traders said.

 

 

"If you get tightness at any date, it would normally attract more metal than usual," said one.

 

 

Several large investment banks were seen building a string of potential squeezes into early next year in a bid to scrape up profits during a tough year.

 

 

Traders said that small inflows would likely be swallowed by other banks offering new deals at higher funding costs, likely keeping premiums largely intact.

 

 

Any major inflows would likely be registered in Vlissingen, where Glencore-owned warehouser Pacorini is said to have stockpiled more than one million tonnes of metal, although smaller inflows could be seen more widely.

 

 

Vlissingen saw several large warrantings, in January, July and August.

 

 

LME aluminium sank to its lowest in 14 months at $1,993 on Friday, down nearly 20 percent this year.