Singapore’s metal inventories are rising, and part of the cause is the slowing global demand.
Since the middle of the previous year, refined lead & zinc have been flooding into Singapore, turning one of the tiniest nations into a vital safe haven for businesses like Trafigura Group and Glencore Plc.
According to bourse data, the total stockpiles of the two base metals in the London Metal Exchange’s Singapore-registered warehouses have increased by over 10 times since May 2023, reaching a record of nearly 430,000 tons in recent weeks.
The global economic slowdown is somewhat to blame for it. The largest offender, despite growing predictions of a US recession, is China, where a protracted housing crisis and a decline in consumer spending have had adverse consequences.
Shanghai Soochow Jiuying Investment Management Co.’s head of trading, Jia Zheng, stated that “soft demand in China is the ultimate reason.”
That, however, is not the whole story.
For many years, Singapore has served as a major base metals distribution hub. Metal piles can be stored for years on Jurong Island, off the southwest coast of Singapore, or they can be swiftly moved to ocean-going vessels when needed.
As things stand right now, Singapore’s growing inventory needs about 140,000 square meters of storage space. For Singapore, which has limited territory, there is a sizable area where labour, transportation, and storage expenses are somewhat expensive.
While less expensive LME warehouses can be found in Malaysia and South Korea, the accumulation in pricey Singapore may be more related to a trading strategy that enables certain businesses to profit from the higher storage costs connected with the city-state than any variations in demand.
Due to the high cost of storage, dealers are increasing their profits by entering into profitable “rent sharing” arrangements with metals warehouses, according to people acquainted with the situation who spoke about confidential information but requested not to be named.
The agreements, which are more frequently utilized in foreign warehouses for copper and aluminium, may cause trading organizations to get a portion of the storage expenses, typically around 50%. However, there is a financial risk for warehouse owners that use them.
The proprietors of the warehouses in Singapore have agreed to split some of their storage fees with dealers in exchange for financial incentives of up to $0 per ton of metal being brought into the facility.
Typically, warehouses are aware that they can charge those expenses to customers who ultimately purchase the metals from storage. However, there would be no customer to reimburse the warehouse operators for their sunk expenses if the traders choose to move their inventory to other warehouses throughout the nation or area, sometimes in exchange for a larger share of the rent. They forfeit the incentives that were awarded as well as the payback of the shared rentals.
Historically, warehouse owners had an unspoken agreement that they wouldn’t attempt to undercut one another’s company in this manner. However, warehouses are forced to cooperate when a trader decides to change the location of metal storage.
This metals storage strategy is being promoted by more than just Glencore and Trafigura. According to the people, Citigroup Inc. has also been moving some metals from rival warehouses to its own, where it has been able to negotiate rent-sharing arrangements. The technique is correct; yet, it exposes the warehouses to additional dangers.
Furthermore, by locating a portion of the world’s metal supply far from countries outside of Asia that might also want the metals, employing Singapore as an inventory center can raise costs in other regions of the world.
Citigroup, Trafigura, and Glencore all declined to comment. The LME claimed to have a thorough set of warehousing regulations in an email, which included limitations on “evergreen” leasing agreements. These regulations, which went into effect in 2019, were meant to shield warehouses against situations in which parties buy metal warrants only in order to get payment after the sale.
The poor prognosis for the demand for metals indicates that the hazards to the warehouses are not going away. Although there are other storage facilities in Southeast Asia, Henry Pang, a seasoned industry veteran who assisted in the establishment of the first Asia LME warehouse in Singapore in the 1980s, stated that Singapore’s location and well-established network of banks and traders allow it to offer adequate liquidity for these inventories in both a financial and logistical sense.