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While inventory levels serve as an interesting measure for fundamental analysis, that measure remains irrelevant for the short term. But when inventory levels change dramatically and over a longer time frame, they can have both an impact on price and also reflect more profound changes within the market. Ultimately, if not immediately, those factors could impact prices.
Both exchange traded and shadow, off-warrant, stocks have declined for a year now. After increasing sharply during lockdowns in 2020, global logistics delays hampered replenishment. The rapid global economic bounce back has seen those inventories drawn down again. In that respect, exchange stocks have done their job. The market’s indifference to first the rise then fall in inventory levels makes sense. However, Overall, LME inventory for example, rose by 1.25 million tons in 2020. A 908k ton jump in so-called shadow stocks, a recent Reuters post reports, dwarfs the 337,000-ton increase in registered inventory. But since then, total LME stocks fell by 2.2m tons last year. Shadow stocks fell the fastest. By the end of December 2021, they totaled under 340k tons.
Shadow stocks and LME inventory drop
Aluminium drove much of the change. China’s energy constraints drove a surge in aluminium imports such that LME aluminium inventory fell by 406k tons last year. Moreover, they have continued to fall some 79k tons this year. Shadow stocks (the most easily accessible for quick delivery) stood at just 297k tons at the end of December down form 1.58m tons a year earlier. Meanwhile, copper shadow stocks shrank by 90% to just 13k tons at the end of December. Shadow stocks of nickel fell by 92% to 2.7k tons, those of zinc by 81% to 23.5k tons and shadow lead stocks saw a paltry 876 tons at the close of 2021, Reuters reports.
Shanghai Futures Exchange (SHFE) copper stocks stood at an even more depleted 40,359 tons going into the Chinese new year holiday period according to a recent Reuters post. Meanwhile, total copper inventory across all three exchanges – LME, SHFE and CME – reached 200,402 tons at the end of January. It fell by 73,000 tons last year, the fourth consecutive annual decline. Furthermore, LME shadow stocks have disappeared even faster the post adds, with the total at the end of November of 18,945 tons. The represents the lowest inventory level since the exchange first started publishing these monthly figures.
Energy crisis and Russian situation support base metal prices
Yet the market has barely acknowledged the draw downs. Base metal prices have support due to the worries over energy costs and supply constraints. In addition, the fear of sanctions on Russia if the geopolitical crisis in Ukraine spirals out of control has also lent price support. Indeed, copper has languished, somewhat rangebound. This, despite over fears of a slowing Chinese economy hitting demand for copper. Other electrification metals like Lithium and Cobalt, however, have powered higher.
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The market appears fixated on fears of a slowing Chinese economy and blind to the precarious inventory position of metals like copper, nickel and aluminium. But while economic stability remains a central plank of Beijing’s policies, according to China Briefing this week, the Central Economic Work Conference stated at their annual conference that the government would “appropriately front-load infrastructure investment” for 2022. Infrastructure investment will likely appear narrower than in previous cycles, more focused on long term goals. However, China will likely serve as the only G7 country to loosen monetary policy this year. Moreover lower interest rates could appear in the cards for China. Beijing seems intent on managing steady growth this year. As such, while copper consumption will not see the building boom boost of previous decades, consumption will unlikely fall.
Lack of supply chain inventory still an issue
Part of the narrative for high prices last year came down to global logistics delays and capacity issues forcing ocean rates higher. But many expected those pressures to ease after the Chinese New Year as covid restrictions slowed. Ocean rates, however, remained persistently high with rates out of India increasing again over recent weeks, undermining hopes of lower metal prices in the short term. Much will depend on the headline issues of Russia-Ukraine and energy prices. However, the lack of supply chain inventory continues to grow. A simple old-fashioned lack of metal may give the next boost to metal prices. Buyer beware.
By AG Metal Miner
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