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Chart In Focus

Squeeze Is Building in Industrial Metals

Chart In Focus
November 22, 2019

The conventional wisdom holds that the trade disagreements between the USA and China are going to lead to low GDP growth, and perhaps even a mini-recession in early 2020.  That belief makes some sense, since tariffs are proven to be a hindrance on economic activity.

But what if the belief is oversubscribed?  That seems to be the case with this week’s chart, which looks at the inventory levels of nickel in the London Metals Exchange warehouses.  Warehouse stocks peaked at 470,000 metric tonnes back in 2015, and now they are down to just 67,000 tonnes.  That is another way of saying that nickel producers think that the current price is a great price at which to sell, and so they are liquidating their accumulated inventories. 

Normally, commodities producers are pretty smart, and know their markets well.  So when they are liquidating, it is akin to when the explosives expert starts running - - you might want to try to keep up.  But at some point, that sort of flight can go too far, and we may be seeing just such a condition right now.  The rapid drop in inventory levels sets up the potential for a squeeze in the nickel market.  If there were to be any sort of supply disruption, there are not the warehouse stocks now like even a few months ago to cover that shortfall. 

Nickel is an industrial metal, used to make some grades of stainless steel, and to make other alloys stronger.  It is also used in some newer battery technologies, such as nickel-metal-hydride, and nickel-cadmium batteries.  So as industrial activity waxes and wanes, so do the prices for nickel. 

The message of tightening nickel supplies is also echoed in the aluminum market.

Aluminum inventory levels at LME

LME inventory levels of aluminum have been falling for even longer than nickel inventories, and are now down to a similar level that led to a big rise in aluminum prices back in 2005.  That does not mean the same thing has to happen this time, but the potential for a squeeze is there.

Here is one more chart of an often overlooked industrial metal: lead.

Lead inventory levels at LME

Its inventory levels have been falling for even longer, since all the way back in 2011, even as prices have remained relatively stable.  It offers the same point, that if there were a sudden global upsurge in economic activity, which increases the demand for these industrial metals, there is not now the same level of inventory to cushion that prospective demand surge, if it appears.  The deeper question is that if that prospective demand surge does appear, triggering a supply squeeze, will the Federal Reserve be able to manage the inflationary implications appropriately, or will they screw things up (again)?

Tom McClellan
Editor, The McClellan Market Report

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