Aluminium stocks on the London Metal Exchange (LME) are poised to hit another all-time record above five million tonnes as soon as next week in a market swamped by a structural surplus.
Stocks are also likely to keep touching fresh records throughout next year as no end is in sight to chronic oversupply, analysts and traders said.
Stocks have ballooned since the 2008 financial crisis as banks spotted money making opportunities from financing deals that effectively locked material in warehouses and as top producer China kept churning out metal as it subsidised loss-making plants to save jobs.
"The market's still generating surpluses, so the stocks have got to go somewhere. Sometimes it goes into unreported stocks and sometimes it ends up on the LME," said analyst Stephen Briggs at BNP Paribas in London.
Stocks in LME registered warehouses of the light-gray metal used in packaging and transport rose on Friday to 5,105,425 tonnes, just 20,375 tonnes short of the previous record set on Feb. 20.
The LME, the world's largest base metals marketplace, oversees a global network of such warehouses, which are meant in part to ensure that industrial consumers can take delivery of stock against the exchange's contracts if necessary - a so-called market of last resort.
Some users complain that the LME is not ensuring this role because its regulations allow long backlogs at warehouses, forcing consumers to wait many months to access metal.
The LME announced proposed revised rules on Thursday aimed at relieving some of the logjams, but analysts said they would do little to reduce the long queues.
PRODUCER DESTOCKING
"We're in a surplus and we'll continue to be a surplus for the foreseeable future, especially with new production coming on next year," said a metal trader in London who specialises in aluminium.
Flows into warehouses were typically stronger at the end of the year as producers tidy up their own inventories, he added.
"You're probably seeing more material becoming available in the fourth quarter as the producers destock and clear the decks for year end."
A steady drip-feed of metal from the world's top producer, Russia's RUSAL, into Glencore International Dutch warehouses in Vlissingen was also inflating supply, traders said.
In April, the companies signed a seven-year deal for RUSAL to supply 1.4 million tonnes this year alone.
Rivalries between warehouse companies to attract metal to earn lucrative storage fees has also been behind some of the fluctuations in LME stocks, Briggs said.
"You see these waves of stocks going up and then stocks going down and I think that largely reflects material being in transit from one LME warehouse to another as these battles carry on. Now, we happen to be at a point now where stuff is coming in," Briggs said.
In financing deals, traders simultaneously buy aluminium and sell it forward for a profit, striking a deal with cheap funding to store it cheaply in the interim.
Some investors may be delaying agreeing such arrangements as tightness has hit nearby parts of the forward curve, reducing returns for some financing deals, another trader said.
December aluminium has traded higher than January for the past six weeks, last at $5 and down from a high of $10.
"What the nearby tightness probably will achieve is that you see less fresh financing deals coming in. At least for the larger transactions people will rather wait for the new year and hope that the tightness will ease off," said a Switzerland-based trader.
Most of these financing deals are in non-LME registered warehouses, where storage costs are cheaper.
Traders estimate another 6-7 million tonnes, not including producer and consignment stock, has built up over the last four years outside the LME warehouse system.
In China, which does not have LME warehouses and is largely self sufficient, commercial stocks of primary aluminium have doubled this year to around 1 million tonnes.
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