LME Aluminum Queue Soars to 159 Days on Trafigura Inflow, Longest Since 2021

Key Takeaway

• LME aluminum delivery wait times surged to 159 days in May due to a massive inflow from Trafigura Group, the longest since June 2021.
• Banks and hedge funds like Citigroup and JPMorgan bought up the aluminum, causing significant delays at Istim Metals' Port Klang warehouses.
• Indian-origin metal deliveries reduced Russian stock concentration in LME warehouses to 42%, down from nearly 90% a month earlier.

Aluminum Delivery Disrupts LME

The London Metal Exchange (LME) has experienced a significant disruption in its aluminum market, with the wait time for delivery at Istim Metals' warehouses in Port Klang, Malaysia, skyrocketing from zero to 159 days by the end of May. This marks the longest queue in the LME system since June 2021, when the wait was 168 days at the same location. The sudden increase in wait times follows a massive delivery of aluminum by Trafigura Group in May, which was subsequently bought up by banks and hedge funds, including Squarepoint Capital LLP, Citigroup Inc., and JPMorgan Chase & Co., who then ordered the metal out again.

The LME has a history of lengthy queues in its aluminum market, often causing controversy among buyers and operational headaches for the exchange. A decade ago, such practices led to regulatory scrutiny and the implementation of new rules designed to prevent the build-up of queues as a business model. One such rule stops warehouses from earning rent on any metal that spends more than 80 days in a queue. Despite these measures, the recent logjam indicates that the issue persists.

Impact on Russian Aluminum Stocks

The influx of aluminum in May, a significant portion of which was of Indian origin, has also affected the composition of stocks in LME warehouses. The concentration of Russian aluminum stocks has decreased to 42% from almost 90% a month earlier, even though the volume of Russian stocks has risen. This shift is noteworthy given the geopolitical tensions and sanctions affecting Russian commodities.

The LME's data highlights the ongoing challenges in managing the flow and storage of aluminum, especially in the context of global supply chain disruptions and shifting trade dynamics. The reduction in the concentration of Russian aluminum stocks could have broader implications for market participants who are navigating these complex geopolitical landscapes.

Historical Context and Regulatory Response

The LME's aluminum market has long been characterized by strategic maneuvers by traders, banks, and warehouses to maximize revenues through the creation of queues. These practices drew criticism from US regulators and consumers, leading to a series of rule changes aimed at curbing such behavior. The recent events at Port Klang suggest that while the rules have had some impact, they have not entirely eliminated the potential for market manipulation.

The LME has reiterated its commitment to discouraging the build-up of queues, emphasizing that its rules are designed to prevent such practices from becoming a viable business model. However, the current situation underscores the ongoing challenges in enforcing these rules and ensuring a fair and efficient market.