January 4, 2023

LME warehouse inventories are starting the year at the lowest levels in nearly 25 years, and AEGIS wonders if the scramble to buy inventories will continue into 2023. Collectively, total inventories across all six major LME metals dropped approximately two-thirds last year. Most notably, zinc inventories dropped by 90%, and aluminum was down nearly 72%. LME inventories are important as they are the “market of last resort,” as traders and end-users generally do not source metals from such warehouses. Also, these inventory levels are thought to be a gauge of metal supply constraints.  (Source: Bloomberg)

AEGIS notes that this substantial drop in LME inventories coincided with a significant decline in metals production, specifically in Europe. For example, high electricity prices across Europe in 2022 forced many zinc and aluminum smelters to curtail production fully or partially due to unprofitability. Specifically for aluminum, AEGIS estimates that approximately 1.16 million mt/yr, or 26% of Europe’s annual smelter capacity has gone offline since late 2021 due to falling demand or high electricity prices. As curtailments increased across Europe, end-users sought out LME stocks to help fill in supply gaps.

Despite the recent run to grab LME inventories, LME aluminum prices finished down about 15% last year. Will more curtailments in Europe and elsewhere cause further depletion of LME inventories? Could that ultimately push prices higher? Aluminum end-users that are concerned about increasing prices could consider buying swaps or call options, as either would establish a maximum aluminum price. Such positions are standard for consumer hedging; however, they can result in opportunity costs or cash costs if metal prices decrease. Please contact AEGIS for specific strategies that fit your operations. (1/4/2023)

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