LONDON, July 13 (Reuters) – London Metal Exchange (LME) stocks are rapidly dwindling.LME warehouses held just 696,109 tonnes of registered metal at the end of June, the lowest amount this century.Inventory halved over the first six months of the year and June’s tally was down by 1.67 million tonnes year-on-year.Register now for FREE unlimited access to Reuters.comThe downtrend has further to run.Nearly 306,000 tonnes of metal were awaiting physical load-out at the end of last month. Available tonnage of all metals was just 390,280.LME shadow stocks, metal stored off-market with the option of exchange delivery, rebuilt modestly in April and May but the year-to-date increase has been a negligible 4,600 tonnes.Shrinking exchange stocks should be a bullish price signal. Right now, however, macro is trumping micro as Western recession fears pummel the industrial metals complex. The LME Index (.LMEX), which tracks the performance of the exchange’s six main base metals, has slumped by 31% from its April peak.The scale of the disconnect between price and stocks is striking. The resulting mismatch of current scarcity and expected future surplus is likely to be resolved by sporadic flare-ups in LME time-spreads.
LME registered and “shadow” stocksSTOCKED OUTThis is currently happening in the LME zinc market. The cash premium over three-month metalAvailable live stocks shrunk to a depleted 14,975 tonnes at one stage in June and are still a meagre 22,475 tonnes.The rest of the headline zinc inventory of 82,200 tonnes is scheduled to depart.It also happened to sister metal lead last year, when the cash premium spiked to over $200 per tonne in August as LME on-warrant stocks fell to less than 40,000 tonnes.Time-spread tightness has been a recurring feature of the LME lead contract ever since and the cash premium is once again edging wider, ending Tuesday valued at $33 per tonne.That’s because lead stocks haven’t rebuilt in any meaningful way, currently totalling 39,250 tonnes with available tonnage at 34,850.The LME tin market has been living with depleted stocks since the start of 2021 and backwardation appears to be now hard-wired into short-dated spreads.PHYSICAL TIGHTNESSLow LME stocks of all three metals reflect extreme physical supply-chain tightness.All three have seen significant supply disruption over the last year with tin smelters hit by coronarivus lockdowns, zinc smelters in Europe powering down due to high energy prices and the Stolberg lead plant in Germany out of action since July 2021 due to flooding. read more Physical premiums for all three metals have hit record highs in Europe and the United States and remain close to those levels even as outright prices have dropped like a stone.The LME has acted as market of last resort for physical buyers and stocks will only rebuild once the supply-chain pressures pass.Chinese exports are helping rebalance both lead and zinc markets but the process is a slow one as freight and logistics bottlenecks brake arbitrage flows.
LME, CME and Shanghai Futures Exchange copper stocksCOPPER’S MUTED REBUILDCopper was stocked out last October, when live LME tonnage fell to 14,150 tonnes and the cash premium exploded to an eye-watering $1,000 per tonne.The LME intervened with lending caps and deferred delivery options, a tool-kit now extended to all its physically-deliverable contracts after the March nickel debacle.LME registered copper inventory recovered to a May peak of 180,925 tonnes but the trend has since reversed. Headline stocks have fallen back to 130,975 tonnes with fresh deliveries being offset by a string of cancellations as metal is turned around for the exit door.Indeed, combined inventory across all three major copper trading venues – LME, CME and the Shanghai Futures Exchange (ShFE)- totalled 261,000 tonnes at the end of June, up 71,000 tonnes on the start of January but down by 150,000 tonnes on June 2021.It’s a muted rebuild considering the world’s largest buyer – China – spent much of the first half of the year constrained by rolling lockdowns.
LME registered and shadow aluminium stocksOFF-MARKET BUILD?Weaker Chinese demand doesn’t appear to have made any impact on ShFE copper inventory, which remains low at 69,000 tonnes, down from 129,500 tonnes a year ago.However, the headline stocks may be deceiving.The Chinese market has been rocked by another multi-pledging stocks scandal reminiscent of the Qingdao fraud of 2014.That seems to have triggered movement of both aluminium and zinc into safe-haven storage and may be deterring copper exchange deliveries.It’s quite possible that such rotation between visible and non-visible storage is accentuating the LME stocks downtrend as well.Registered aluminium stocks, for example, collapsed by 64% over the first half of the year. Live tonnage stands at just 156,300 tonnes.Yet there is no sign of tension in aluminium time-spreads, the cash-to-three-months period trading in mild contango.The market seems to be assuming that there is no shortage of aluminium despite the headline stocks figure ticking lower every day.But if metal is available, it is evidently sitting in the statistical darkness.One small clue as to its existence was a 92,000-tonne build in LME shadow aluminium stocks over the course of April and May.Such metal is primed for LME warranting if price and spreads move into the right alignment and the recent rise suggests that some metal at least is being enticed back to the paper market from the physical market.REGIONAL IMBALANCEJust about all of the shadow aluminium stocks build has occurred in Asia, which accounted for 87% of the 289,978 tonnes in this category at the end of May.LME warehouse locations in Europe held just 21,642 tonnes and U.S. ones 14,608 tonnes.The same regional skew is clear to see across all the LME base metals and is as equally true of registered stocks as it is of shadow inventory.It is a symptom of the supply and freight issues that have roiled the metals markets since the onset of COVID-19 two years ago.It is also a warning that metals supply chains are still far from functioning efficiently, even as prices bow to the weight of macro selling.The opinions expressed here are those of the author, a columnist for Reuters.Register now for FREE unlimited access to Reuters.comEditing by Kirsten DonovanOur Standards: The Thomson Reuters Trust Principles.Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias. .
Global aluminium production by power source 2020FROM LOW CARBON…Coal is still the globally dominant source of power for smelting aluminium, reflecting the market dominance of China, which last year accounted for around 58% of world primary output.Within China there has been a rush to swap coal-fired capacity for new plants in hydro-rich Yunnan province but spaces are fast running out and most of the country’s smelters continue to run on captive coal plants or draw energy from coal-based grids.Changing the source of power from fossil fuel to renewables is the fastest way of lowering primary aluminium’s carbon footprint.Outside of China, the rush to go green has been led by those producers with large captive hydro generation capacity.The LMEpassport for ESG accreditation now lists several aluminium producers, including Russia’s Rusal, U.S. operator Century Aluminum (CENX.O), Indonesian producer Asahan Aluminium and smelters in France (Dunkerque) and the United Kingdom (Lochaber).All have disclosed carbon equivalent footprints of 0-4 tonnes per tonne of aluminium, referencing research house CRU’s Emissions Analysis Tool.No-one yet can make it to zero on a commercial basis.The new green aluminium coalition accepts that its 10% purchase commitments for near-zero metal will be dependent on “advanced technologies not yet commercially available”….TO NO CARBONThe collective race to get to zero or near-zero aluminium is already underway, led by ELYSIS, a joint venture between Alcoa and Rio Tinto.It requires the replacement of the carbon anode in the electrolytic smelting process. The anode accounts for 1.9 tonnes of carbon per tonne of aluminium, the largest remaining carbon problem for a renewables-powered smelter, according to Tim Murray, chief executive of Cardinal Virtues Consulting, also presenting at the CRU conference.The anode being trialled in the ELYSIS process results in zero direct emissions, a much longer anode life and 15% lower costs, Alcoa chief operations officer John Slaven told delegates.If the smelter is fed with “green” alumina, the carbon impact falls below 1 tonne per tonne of metal, freight accounting for most of the residue.A processing path to near-zero primary aluminium is starting to take tangible shape.NO GREEN SANCTIONSThere has been concern that aluminium’s race to go green would be abruptly halted by Russia’s invasion of Ukraine and the possible sanctioning of Rusal metal.Rusal is already a major supplier of low-carbon aluminium from its hydro-powered smelters in Siberia and is itself working on inert anode technology.Fortunately for carbon-conscious buyers, the company was already put through the U.S. sanctions process in 2018, resulting in owner Oleg Deripaska (still sanctioned) giving up control of the company.That shields Rusal this time around. So too do memories of the sanctions supply-chain disruption which stretched from Guinean bauxite mines to European automakers.Rusal’s significance as a supplier, particularly to Europe, will only increase as buyers look for low-carbon metal.NO GREEN PREMIUM…YETThe First Movers Coalition is intended to create a decarbonisation tipping-point for individual sectors centred on future purchase commitments.The incentive for suppliers will be a premium for their low-carbon aluminium, according to Trafigura chief executive Jeremy Weir.Such a green premium remains conspicuous by its absence at the primary metal stage of aluminium’s process chain.And it might not appear for long at all, Colin Hamilton, commodities analyst at BMO Capital Markets, told the CRU conference.Rather, a green premium would simply be a “stepping-stone to low-carbon becoming the prime market and anything else sub-prime.”We may not have to wait much longer to find out because the drive to zero-carbon aluminium has just accelerated.The opinions expressed here are those of the author, a columnist for Reuters.Register now for FREE unlimited access to Reuters.com
US ‘term premium’ stays negative
Fed contrast between Yield Curve and Near Term Forward SpreadBUMP IN THE NIGHTSo what’s the beef with the term premium?In effect, the Treasury term premium is meant to measure the additional yield demanded by investors for buying and holding a 10-year bond to maturity as opposed to buying a one year bond and rolling it over for 10 years with a new coupon.In theory it covers all the things that might go bump in the night over a decade hence – including the outside chance of credit or even political risk – but it mostly reflects uncertainty about future Fed rates and inflation expectations.At zero, you’d assume investors are indifferent to holding the 10-year today as opposed to rolling 10 one-year notes.But the New York Fed’s measure of the 10-year term premium remains deeply negative to the tune of -32 basis points – ostensibly suggesting investors actually prefer holding the longer-duration asset.Although the premium popped back positive in the first half of last year, it’s been stuck around zero or below since 2017 – oddly in the face of the Fed’s last attempt to unwind its balance sheet.And the persistent and puzzling erosion of the term premium to zero and below brings it back to the 1960s, not the much-vaunted inflation-ravaged 1970s that everyone seems to think we’re back in.It matters a lot now as the debate about the inversion of the 2-10 yield curve heats up and many argue that the signal sent by that inversion is less clear about a coming recession as it’s distorted by the disappearance of the term premium.In the absence of a term premium, the long-term yield curve is just a reflection of long-run policy rate expectations that will inevitably see some retreat if the Fed is successful in taming inflation over the next two years.Fed Board economists Eric Engstrom and Steven Sharpe late last week also dismissed the market’s obsession with a 2-10 year yield inversion signalling recession.In a blog called ‘(Don’t Fear) The Yield Curve’ they said near term forward rate spreads out to 18 months were much more informative about the chance of a looming recession, just as accurate over time and – significantly – heading in the opposite direction right now.The main reason they pushed back on the 2-10s was it contained a whole host of information about the world beyond two years that’s simply less reliable as an economic signal and “buffeted by other significant factors such as risk premiums on long-term bonds.”But what could see the term premium return?Presumably the Fed’s planned balance sheet rundown, or quantitative tightening (QT), would be a prime candidate if indeed its long-term bond buying has distorted term premia.But the last Fed attempt at QT in 2017-19 didn’t do that and Morgan Stanley thinks it will be some time yet before just allowing short-term bonds on its balance sheet to roll off and mature gets replaced by outright sales of longer-term bonds.”QT is not the opposite of QE; asset sales are.”Of course, maybe the world just hasn’t changed that much – in terms of ageing demographics, excess savings and pension fund demand, falling potential growth and negative real interest rates. Once this current storm has passed, investors seem to think that will dominate once more. read more 
Fed balance sheet and maturitiesThe author is editor-at-large for finance and markets at Reuters News. Any views expressed here are his ownRegister now for FREE unlimited access to Reuters.com
LME zinc price and stocks, Shanghai stocksEUROPEAN POWER-DOWNOne European smelter – Nyrstar’s Auby plant in France – has returned to partial production after being shuttered in January due to soaring power costs. But run-rates across the company’s three European smelters with combined annual capacity of 720,000 tonnes will continue to be flexed “with anticipated total production cuts of up to 50%”, Nyrstar said.High electricity prices across Europe mean “it is not economically feasible to operate any of our sites at full capacity”, it said.Still on full care and maintenance is Glencore’s (GLEN.L) 100,000-tonne-per-year Portovesme site in Italy, another power-crisis casualty.Zinc smelting is an energy-intensive business and these smelters were already in trouble before Russia’s invasion sent European electricity prices spiralling yet higher.Record-high physical premiums, paid on top of the LME cash price, attest to the regional shortage of metal. The premium for special-high-grade zinc at the Belgian port of Antwerp has risen to $450 per tonne from $170 last October before the winter heating crisis kicked in.The Italian premium has exploded from $215.00 to $462.50 per tonne over the same time frame, according to Fastmarkets.LME warehouses in Europe hold just 500 tonnes of zinc – all of it at the Spanish port of Bilbao and just about all of it bar 25 tonnes cancelled in preparation for physical load-out.Tightness in Europe is rippling over the Atlantic. Fastmarkets has just hiked its assessment of the U.S. Midwest physical premium by 24% to 26-30 cents per lb ($573-$661 per tonne).LME-registered stocks in the United States total a low 25,925 tonnes and available tonnage is lower still at 19,825 tonnes. This time last year New Orleans alone held almost 100,000 tonnes of zinc.
Fastmarkets Assessments of Antwerp and Italian physical zinc premiumsREBALANCING ACTAbout 80% of the LME’s registered zinc inventory is currently located at Asian locations, first and foremost Singapore, which holds 81,950 tonnes.There is also plenty of metal sitting in Shanghai Futures Exchange warehouses. Registered stocks have seen their usual seasonal Lunar New Year holiday surge, rising from 58,000 tonnes at the start of January to a current 177,826 tonnes.Quite evidently Asian buyers haven’t yet been affected by the unfolding supply crunch in Europe and there is plenty of potential for a wholesale redistribution of stocks from east to west.This is what happened last year in the lead market, China exporting its surplus to help plug gaps in the Western supply chain. Lead, however, should also serve as a warning that global rebalancing can be a slow, protracted affair due to continuing log-jams in the shipping sector.MOVING THE GLOBAL DIALWhile there is undoubted slack in the global zinc market, Europe is still big enough a refined metal producer to move the market dial.The continent accounts for around 16% of global refined output and the loss of production due to the regional energy crisis has upended the zinc market narrative.When the International Lead and Zinc Study Group (ILZSG) last met in October, it forecast a global supply surplus of 217,000 tonnes for 2021.That was already a sharp reduction from its earlier April assessment of a 353,000-tonne production overhang. The Group’s most recent calculation is that the expected surplus turned into a 194,000-tonne shortfall last year. The difference was almost wholly down to lower-than-forecast refined production growth, which came in at just 0.5% compared with an October forecast of 2.5%.With Chinese smelters recovering from their own power problems earlier in the year, the fourth-quarter deceleration was largely due to lower run-rates at Europe’s smelters.The ILZSG’s monthly statistical updates are inevitably a rear-view mirror but Europe’s production losses have continued unabated over the first quarter of 2022.Moreover, the scale of the shift higher in power pricing, not just spot but along the length of the forward curve, poses a longer-term question mark over the viability of European zinc production.A redistribution of global stocks westwards can provide some medium-term relief but zinc supply is facing a new structural challenge which is not going away any time soon.The opinions expressed here are those of the author, a columnist for Reuters.Register now for FREE unlimited access to Reuters.com