Inventories of industrial metals are building up in factories, smelters and warehouses not linked to financial exchanges, giving a misleading picture of how the covid-19 outbreak is hitting the sector.
Global industrial activity plummeted after lockdowns forced wide swathes of companies to temporarily shut down, hitting demand for metals such as aluminum, zinc and nickel.
While overall stocks of metals have increased in warehouses that release data, the total amount of surpluses are much higher, especially in aluminum, analysts say.
Aluminum inventories have already climbed and are forecast to surge by 5 million tonnes by the end of this year to 16 million, according to Eoin Dinsmore at consultancy CRU, but only a fraction of them will show up in warehouses registered with exchanges such as the London Metal Exchange.
Most of the build up is in Asia, where investors arrange lucrative financing deals to store the metal, widely used in transport and construction.
“Aluminum is a classic case, you can’t trust the inventory data, it’s just the tip of the iceberg in terms of what’s really going on,” said analyst Oliver Nugent at Citi in London.
“We think we saw a fair bit of involuntary stocking along the supply chain and this would have been in forms that would not be LME deliverable.”
Benchmark aluminum is the worst performing metal so far this year on the LME, down 15%.
For zinc, mainly used for galvanizing steel, stocks have been piling up at smelters, said Colin Hamilton at BMO Capital. “I wouldn’t be surprised if producers were holding a month’s more of inventory than they were at this time last year.”
Total unreported zinc stocks are due to climb by 44% to 890,000 tonnes by the end of June, according to Helen O’Cleary at CRU.
Hidden zinc stocks overwhelm those in exchange warehouses, currently at 208,795 tonnes.
In nickel, the biggest growth in unreported stocks has been in alloys – ferronickel and nickel pig iron – used to make stainless steel.
Analyst Jim Lennon at Macquarie said stocks of those products in China have quadrupled to 60,000 tonnes, although it was unclear whether this build-up was linked to the coronavirus.
Unlike some other metals, about 50,000 tonnes of refined nickel have moved from unreported warehouses to LME sheds, he added.
(By Eric Onstad; Editing by Jane Merriman)