What Aluminum Canceled Warrants Mean for Stock and Trade

What are the key trends within the aluminum industry right now, specifically relating to the LME aluminum price? 

There are various interesting trends developing which, at first sight, appear contradictory. However, in reality, some common drivers exist. Obviously the LME price has risen from a rather range-bound $1,750-$1,800 level to nearly $1,900 over the last month or so. And despite what other analysts say about narrowing of forward spreads (in other words, less of a contango) we aren’t ready to say that the contango is gone, but it has become perhaps more volatile in recent days. The physical delivery premium has remained relatively steady at $385-460/ton – depending on whom you believe, and whether you work from the CME-priced premium or what buyers actually pay. We also see a massive shift in on-warrant stocks being liquidated (or at least put in the queue for liquidation). In fact, canceled metal in all LME locations now represents 67% of total stocks – that’s two-thirds heading for the door and one-third currently available for trade.

What do you think is causing spot prices to rise? Is there a metal shortage? Is demand up? Is the market being manipulated? 

The standard producer response goes like this: “the market has finally reacted to all the smelter closures causing a tightening of supply.” That makes sense, so one might expect the physical delivery premium would continue to rise too, but alas, that hasn’t occurred. Yes, a metal shortage exists. It has since the beginning of the year. We would argue, though, that the shortage is reflected in physical premiums. A different set of dynamics has driven the rise in the LME. Perhaps the trade has begun using the LME more now? Queues primarily exist at two locations. It’s unlikely the mass warrant cancellations and the increase in aluminum prices are not somehow related.