As of October, a record seven to ten million tons of aluminum were being housed in a hidden system of shadow warehouses, in countries as far apart as Malaysia and the Netherlands, according to estimates from several analysts.
The amount dwarfs the 5.5 million tons of aluminum in the LME-licensed warehouses, based on LME figures as of Tuesday. Just 12 months ago, the figures were about equal. A similar shift is taking place with other industrial metals like copper, nickel and zinc, analysts say.
These warehouses operate outside the London Metal Exchange system of warehouses and so are unregulated and don’t disclose their holdings. With no clear insight into how much metal is in the shadow system, setting prices will become increasingly difficult.
The flow of metal into shadow warehouses already is making prices move in unpredictable ways—such as when a large amount of unaccounted-for metal suddenly makes its way onto the market.
The lack of transparency is making this shadow system increasingly attractive to institutions seeking to profit from information that other buyers and sellers don’t have. Some companies also are seeking a cheaper alternative to the LME warehouses, which can be 10 times as expensive as the unregulated storage.
Also, starting April 1, LME warehouses with wait times exceeding 50 days must deliver out more metal than they take in. The delays help boost income from rent and increase the fees paid for faster service, so warehouse owners are expected to increase LME rent charges to offset any reduction in profits.