May/June 1992
LME warehouses are overflowing with aluminum, casting a shadow over the world market. Where did all this metal come from and what will it take to reduce the flow? Here are some answers.
BY SI WAKESBERG
Si Wakesberg is New York bureau chief for Scrap Processing and Recycling.
More than a million metric tons (mt) of aluminum has been squeezed into London Metal Exchange (LME) warehouses all over the world. So much metal has been accumulated, in fact, that the warehouses can't hold it all, and some is now reportedly being shoved into the open for lack of indoor space.
A major source of this aluminum flood seems to be Eastern Europe —particularly the republics of the former Soviet Union , which are said to have shipped a sizable chunk of the stunning age warehouse tonnage in recent months. While Western World producers have reduced their output in response to pleas for cutbacks, their counterparts behind the crumbled iron curtain have exported enough metal to more than counterbalance these reductions, say U.S. analysts studying the situation.
Aluminum from the region has been flowing westward at such an intensified pace, in fact, that observers expect it to choke the already-sputtering international aluminum market if shipments don't slow down. A case in point: According to a German news report, Vereinigte Aluminum Werke, a prominent German aluminum producer, will be forced to cut production even more than it has, if Russian exports continue at the same rate.
In Search of Cash
The primary reason why so much aluminum has been pouring out of Russia and other former Soviet republics is simple: Their economies are said to be in appalling shape and selling their aluminum seems to be a quick method for obtaining dollars or other hard currency. Emphasizing this point, LME Chairman David King notes, "Centrally controlled economies, such as Russia , are now in need of hard currency during this difficult transition period. The quality of Russian metal is good and, as a result, they're getting favorable prices for their aluminum."
Nevertheless, King says he anticipates some cutbacks in the flow of Russian aluminum this year, noting that the European Economic Community has been discussing with Russian representatives how to slow down shipments to the West. A number of industry analysts insist, however, that the need for cash is just too great to influence a lowering of exports.
Peter W. Merner, president of Merner Research (New York City), believes that there could be a minor reduction of Russian aluminum shipments, but stresses the word minor. In 1991, he says, physical aluminum shipments from Russia —combined with exports from all other former Soviet republics, other Eastern European countries, and China—totaled a little more than 1.5 million mt. Looking ahead, he expects 1992 shipments to fall to just over 1.2 million mt, and 1993 exports from these nations to hit slightly below the 1-million-mt mark.
Forcing the Issue
Bureaucratic forces may slow down Russian aluminum shipments even more than that. Gennady T. Romanov, an official with Amtorg Trading Corp. (which historically handled Soviet-American trade from its New York City offices), points to two problem issues that may inhibit Russian aluminum exports this year: export licenses and duties.
"Every aluminum producer that wants to ship metal out of the country must now get an export license for the shipment," he notes. Prior to the breakup of the Soviet Union , Romanov explains, exports were under the aegis of Raznoimport, which controlled all Soviet metal shipments and, thus, was the only party required to hold an export license. Acquiring individual export licenses in a bureaucracy-tangled Russia , he indicates, is not the easiest thing in the world to accomplish.
The second issue—the "heavy" customs duty of approximately $300 per mt that Russia placed on raw material exports at the beginning of this year—may be even more frustrating for that nation's aluminum shippers. Protests from aluminum producers in Russia and other former republics have already been heard: The Bratsk aluminum smelting works in Eastern Siberia —said to be one of the largest in the world, with an annual capacity of 800,000 mt—has reportedly urged Russian President Boris Yeltsin to abolish the duty. In addition, it's been reported that the 250,000-mt-capacity smelter at Krasnoyark, in Western Siberia , has threatened to shut down unless the customs duty is repealed.
Recent reports out of Russia indicate that the government is working to resolve both of these issues. Nevertheless, rumors that licensing requirements were being done away to allow exporters a free hand in shipping raw materials could not be confirmed. Likewise, at press time, there had been no official statement verifying news that export duties had been reduced or—as some accounts report—abolished. Whether any action has already been taken, many observers think that the Russian government will eventually either cut the duty drastically or remove it altogether.
Until that time, it is possible, of course, that these bureaucratic obstacles will tend to diminish the pace of Russian aluminum exports to the West. In fact, some late reports would indicate that the flow of metal from Russia in recent weeks, at about 2,000 mt per week, is already a substantial decrease from shipment levels recorded at the close of 1991.
Some U.S. observers are skeptical, however, noting that attempts are being made to negotiate barters of food for aluminum. And regardless of whether such a trade does occur, these observers believe that the drive for hard currency will continue to propel the level of exports and build on the already-overwhelming quantity of aluminum stored in LME warehouses. In one week in late February, for example, inventories rose by more than 20,000 mt. And though reports indicate that most of this metal came from South America , not Russia , as one merchant points out, "It really doesn't matter where it comes from. The question is when will it begin to decline."
What's It Really Mean?
Who is financing the purchase of all this aluminum? According to a London report in the New York Journal of Commerce, most of the aluminum in LME warehouses is being held by banks and "industry sources say that Arab investors are providing most of the money behind this operation." The banks hold LME warrants (which are like bearer bonds), the story points out, giving the holder the right to take material on presentation.
Commenting on this report, the LME's King notes that "banks finance trading," with the metal used as collateral for the banks' broker and merchant customers.
Meanwhile, some traders call concern over the inventory situation "overblown," noting that despite the high level of aluminum in warehouses, prices on the LME have been advancing. In fact, throughout March, the LME cash price seemed to be holding in the mid-to-upper-50s-cent-per-pound range. If demand reappears, these traders point out, attention will be on demand rather than on stocks.
In this regard, it is interesting, perhaps illuminating, to look back on a presentation at last September's Scrap Processing and Recycling Aluminum Roundtable. Examining the period between 1972 and 1976, when the General Services Administration (GSA) began to sell off more than 1.1 million mt of prime aluminum held in the national strategic stockpile, Fred Lonner, president of Fred Lonner Co. (New York City), showed how average prices rose as the stockpile inventory fell. See table below [CHECK LOCATION] for a summary of his comparison.
Today's situation isn't quite the same, with world aluminum production estimated at more than 17 million mt, compared with about 11 million mt in 1972. Yet, some are drawing on Lonner's comparison in their speculations of what might happen when the immense LME aluminum stockpile begins to be whittled down. Will prices again rise as effectively as they did in 1972?
As long as the LME warehouses are overflowing with aluminum, observers can only theorize the answer. In the meantime, analysts seem to agree that three ingredients are necessary to put the world aluminum market back on track:
- a pickup in the economy to bring back more visible demand;
- production cuts by world producers; and
- a decrease in shipments of Russian metal.
If one or two of these ingredients make themselves felt this year, as some observers predict, it could help reduce the bulging LME inventories and give the aluminum market a much-needed push toward recovery. •
Comparing Aluminum Prices to National Stockpile Reductions
Aluminum Average price
Inventory per pound
Reduction (Metals Week)
1972 5,443 mt 20.5c
1973 635,489 mt 26.4c
1974 463,123 mt 43.1c
1975 2,268 mt 34.8c
1976 8,165 mt 41.3c
LME warehouses are overflowing with aluminum, casting a shadow over the world market. Where did all this metal come from and what will it take to reduce the flow? Here are some answers.