Earlier this year the LME began to publish inventory data for stocks held off warrant within LME approved warehouses. We now have records for six months (February-July) and, looking at the aluminium market, a number of points stand out.
Shadow inventories are smaller than stocks on LME warrant, although not as small as you might think. Over the six month period, they have varied between 67 and 80 percent of the average monthly tonnage on warrant.
The off-warrant stocks have risen steadily each month, as did warrants with the exception of March, when warrants fell. Both off- and on-warrant stocks saw their big month-on-month rise in percentage terms in April, coinciding with the Covid shutdowns, although off-warrant stocks rose at their fastest pace in July..
Both reached a peak in tonnage terms in July, with off-warrant stocks hitting 1.22 million tonnes and on-warrant stocks 1.65 million tonnes.
What happens next will be interesting. Warranted stocks declined to an average of 1.59 million tonnes in August, and this month they have continued to fall, with the tally now at 1.47 million tonnes, its lowest since May.
The LME publishes shadow stock data in arrears, so there are no numbers yet for August and September. If they continue to rise, though, they will have begun to diverge from the on-warrant trend, potentially injecting some scepticism into the market. Lower numbers would indicate that aluminium is less available, or, more probably, being stored away from the LME system.
For now, inventories are the most important signal for ChAI’s aluminium price predictions, accounting for more than double the weighting of other inputs. Macro is the runner up, followed by CTA and Curve.
Looking at ChAI’s Activity Indexes, the CTA signal is bearish across the 1 Week, 1 Month and 3 Month predictions. The Inventories signal is also strongly bearish at 1 Month, and marginally so at 3 Months, although it is bullish at 1 Week.
This positive showing for inventories at 1 Week has translated through to ChAI’s price predictions, and we estimate that aluminium prices will probably rise in the first week of October. The ChAI model is less positive for prices at 1 Month and 3 Months, predicting they are more likely to fall than rise.
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Originally published at https://chai-uk.com on September 30, 2020.
