SINGAPORE – Metal stockpiles are surging in Singapore, and slowing global demand is only part of the reason.
Refined zinc and lead have been pouring into the city-state since the middle of 2024, making it a critical vault for companies including Trafigura and Glencore.
The combined inventories of the two base metals in the London Metal Exchange’s (LME) Singapore-registered warehouses have grown more than tenfold since May 2023 to a record of almost 430,000 tonnes in recent weeks, according to bourse data.
Behind it, in part, is the slowdown in the global economy. While bets on a US recession are rising, the biggest culprit is China, where a years-long property crisis and a lack of consumer spending has rippled across the globe.
“Soft demand in China is the ultimate reason,” said Ms Jia Zheng, the head of trading with Shanghai Soochow Jiuying Investment Management. “Traders are waiting for the Chinese demand recovery so they can ship these supplies to the world’s largest market quickly.”
That is not the entire story, though.
Singapore has been an important distribution centre for base metals for decades. On Jurong Island and in Sembawang, stacks of metal can be left for years or quickly transferred to ocean-going ships when needed.
At current levels, the inventories accumulating in the Republic require approximately 140,000 sq m of storage space.
That is a large area for land-limited Singapore, where costs for storage, as well as transportation and labour, are relatively high.
The build-up in the country – when cheaper LME warehouses are available in Malaysia and South Korea – may have more to do with a trading strategy that allows some companies to benefit from the higher storage costs associated with the city-state than any fluctuations in demand.
Rent sharing deals
With storage costs high, traders are boosting their revenue through lucrative “rent sharing” agreements with metals warehouses, according to people familiar with the matter who asked not to be identified discussing private information.
The agreements – more commonly used in copper and aluminium warehouses in other countries – can result in about half of the storage costs getting shared with trading companies. But they come with a financial risk for warehouse operators.
In order to lure traders to their warehouses in Singapore, the operators have not only agreed to share some of their storage fees, they have also offered financial incentives worth as much as US$50 per tonne to attract metal to their facility.
Normally, warehouses know they can pass those costs on to clients who eventually buy the metals from storage.
But if the traders decide to shift their inventories to other warehouses in the country or region – in some cases for a bigger cut of the rent costs – there is no client to compensate the warehouse operators for their sunk costs. They lose both the incentives paid out and the repayment on the shared rents.
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Publish date : 2024-08-15 14:32:00
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