Wild ride ahead for metals as Glencore warns on emptying sheds

For metals traders, the big story of next year may not be trade relationships or an economic slowdown, but emptying warehouses.The size of stockpiles that underpin London Metal Exchange contracts have fallen near the lowest in a decade, and traders could face a wild ride if the trend continues. That’s because it would leave a smaller buffer to absorb sudden changes in supply and demand and make it easier for traders to squeeze the market with large single positions.“When the inventory cushion isn’t there, then prices need to move in response to fundamentals,” said David Lilley, managing director of Drakewood Capital Management. “Given the fact there are no meaningful inventories at the moment those movements may not be trivial.”Inventories have fallen for reasons ranging from supply deficits to stricter exchange rules. Dwindling stockpiles, which serve as crucial last-resort supplies for the industry, are making some traders more optimistic about prices next year. Ivan Glasenberg, who heads the most powerful metals trader, Glencore Plc, expects metal stockpiles to keep falling even if demand growth is weaker than expected.“You’re going to have to dig deeply into your inventory levels” in 2019 if demand grows at the same rate as this year, Glasenberg said on a call with analysts this month. Measured by days of consumption, global stockpiles of nickel, zinc and copper are already at record lows, according to analysis from Glencore.Low stockpiles are already causing ramifications across the industry. Buyers have paid large premiums to obtain copper and zinc at short notice on the LME, a condition known as backwardation. That exposes traders and consumers to losses on hedges against metal that’s flowing through their supply chain. And for bearish investors who sold heavily in recent months, it’s becoming more expensive to buy those positions back.That market structure also encourages physical owners to shift metal back onto the exchange, sometimes causing prices to whipsaw. In recent years, traders dumped copper onto the LME when backwardations emerged, contributing to a see-saw pattern in inventories.Exchanges are concerned too. Having seen aluminium and copper stockpiles plunge at least 75% in about five years and nickel inventories halve since mid-2015, the LME is looking at ways to make it easier for warehouses to attract more metal into their depots.Glencore has played a significant role in emptying LME warehouses, according to people with direct knowledge of the matter. For example in copper, the company – spearheaded by outgoing trader Telis Mistakidis – has for several years used LME supplies to supplement its contracts with producers. Continuing to do so could further deplete copper stockpiles on the LME, which currently equate to just a couple of weeks of Glencore’s trading volume last year.The Swiss company holds such a sway over the market that copper’s backwardation eased sharply after Mistakidis’s retirement was announced in early December. Some traders attributed the move to speculation that Glencore could change its trading strategy under new leadership.One factor that’s exacerbated the drop in copper stockpiles this year is that while miners have produced plenty of ore, the smelters that turn it into refined metal have suffered a slew of outages. If smelting output rises next year, more metal could find its way onto the LME. But a long-term pickup in inventories will require miners to dig more out of the ground. Glasenberg has been famously averse to doing that, and he gave no hints this month that such discipline is about to change any time soon.“We don’t want to start predicting markets up and start pumping tons into those predicted futures markets,” he told investors. “We’d rather sit on our hands and wait for the markets to rise, and when they do rise to levels that we like, then we will go ahead.”