LME Aluminum Inventories Rise, Canceled Warrants Fall

Falling Aluminum Prices May Put a Damper on Alcoa's 4Q15 Earnings

(Continued from Prior Part)

LME aluminum inventory

Aluminum inventories in LME (London Metals Exchange) registered warehouses stood at 2.9 million tons on December 22, 2015. LME aluminum inventories peaked at ~5.5 million tons in mid-2013 and have been falling since then. On a year-to-date basis, LME aluminum inventories have fallen more than 30%.

Canceled warrants

However, LME aluminum inventories have risen slightly in December, as can be seen in the graph above. Aluminum inventories have risen by roughly 1% this month. However, the percentage of canceled warrant stocks has fallen to 38% compared to 44% at the beginning of the month.

It’s important to note that all metal that enters LME warehouses is on a warrant. The warrants are canceled when the bearer of these warrants requests the physical delivery.

Investors looking at direct exposure to aluminum can also consider the PowerShares DB Base Metals ETF (DBB). DBB invests one-third of its holdings in aluminum.

Bearish indicator?

In theory, rising aluminum inventories and falling canceled warrant stocks are negative for commodity prices. However, we need to look at these indicators with a pinch of salt. Along with the aluminum inventories in the LME registered warehouses, a lot of aluminum is stored in non-LME locations. It’s difficult to estimate the amount of aluminum in non-LME locations, as we don’t have any official estimates.

During the Alcoa’s investor day, the company’s management commented on aluminum inventory. According to Alcoa (AA), current global aluminum inventories equal 62 days worth of demand. However, Norsk Hydro (NHYDY) estimates global inventory days at ~95. Note that Norsk Hydro has also accounted for unreported aluminum stocks while arriving at its estimate.

Investors looking at a diversified exposure to the materials sector can also consider the Materials Select Sector SPDR ETF (XLB). Together, Avery Dennison (AVY) and Ball (BLL) form ~3.1% of XLB’s portfolio.

In the next part, we’ll discuss how Alcoa’s Alumina segment could fare in 4Q15.

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