Non-ferrous metal inventories and the London metal exchange: a commentary

This commentary is a descriptive analysis of available data on global inventories of non-ferrous metals, with particular attention to stocks held in the registered warehouses of the London Metal Exchange (LME). Long-term trends in reported global stocks of copper, lead and zinc are first illustrated, subdivided by the main categories of holder. The commentary then moves to trends in LME stocks of those three metals plus aluminium, nickel and tin, bringing out their sharp fluctuations over the course of the business cycle. With the rise in China’s dominance of the metals industry, the LME has lost its share of these volatile stocks. The next section shows how the locations and origins of LME stocks have altered over time in response to changes in patterns of global production and usage. As markets of last resort, the LME, along with the other terminal market exchanges, experiences large inflows of metal into warehouses when global production exceeds demand and corresponding outflows in the reverse circumstances. Within the restrictions of the available data, the commentary shows how changes in stocks held by the LME and other exchanges have moved compared with estimated global balances between production and usage. Changes in exchange inventories and market balances have tended to move in the same direction and very roughly the same extent. That correspondence tended to weaken for some metals in the past decade during which changes in market balances were far more volatile than changes in exchange stocks. There were, seemingly, big changes in unreported stocks. The size of such pools of metal is, by its very nature, indeterminate, but the next section examines some data on off-warrant stocks held in LME registered warehouses. Even where the level of exchange inventories appears constant, there are continuous flows into and out of warehouses. That is highlighted by data on gross and net flows for LME warehouses. Part of the gross movements arises from metal owners moving metal onto and off warrant, often to take advantage of differences in rents. The level of exchange stocks is a function of the balance between global production and consumption, rather than of the level of either. This inevitably means that the ratio between exchange stocks and turnover, whilst highly cyclical, will tend to fall over time. Periods of low stocks can potentially complicate management the LME’s role in determining prices. The final section looks at the relationship between LME inventories and turnover.