Last month, the London Metal Exchange (LME)'s aluminium stock saga took a surprising turn.

In April, the focus was on Russian metal.

The latest U.S. sanction package banned exchanges from accepting Russian aluminum produced after April 12, The LME was forced to change its rules in order to stop traders from sending existing stocks on Russian brand metal to creatively avoid the exchange.

A large threat loomed that more Russian metal produced prior to the cut-off would be delivered to the LME.

On May 9, there was indeed a massive stock dump. Even by the LME standards, the 425 575 metric ton warranting on a single day was massive. Even more impressive was the reverse cancellation of 137.050 tons on the same date.

The LME's preferred delivery point for Russian-brand aluminium is the South Korean Port of Gwangyang. But the majority of the metal in the shipment was Indian, not Russian.

Over the next two weeks, another 226,950 tonnes were added.

The buyers have been eager to take advantage of the deliveries. Metal buyers may face a 159-day load-out line.

This was, of course, the intent of the stock dump. The storage dynamics behind the Russian play in April are at the core of the current stock churn.

When there is too much aluminum around, they always are.

A PROFITABLE QUEUE

Massive deliveries made last month went to a warehouse in Port Klang.

According to the latest LME monthly warehouse report, ISTIM UK Ltd sheds received 652,525 tonnes of aluminium during May.

ISTIM cancelled 458,375 tonnes by the end the month. The massive transfer of metal created the longest queue for load-out since June 2021.

Why are so many recently delivered metals being sold again? The new owners are locked into a deal where their rent will be split between ISTIM, the entity who delivered the metal and Trafigura.

Only by canceling the warrants, and moving the metal physically to another warehouse operator can you break the deal. Many do just that. They seem to have calculated that it is worth the wait.

The revenue that can be generated by a queue for a loadout is different from what it used to be in the 2010s when the long waits for aluminum to leave Detroit caused the relationship between LME pricing and the physical market to become distorted.

The exchange has tightened up its rules, including faster loading rates and a limit on the revenue that can charged for metal stuck in a line.

A queue can still be profitable for a warehouse operator who will use the revenue expected to lure metal by offering a rent sharing deal, knowing that new owners are likely to rush out the door as quickly as possible.

ISTIM has been using the model for years and Port Klang is now a hub for LME aluminum stocks liquidity. In the period 2019-2023, there were only 10 months when ISTIM didn't have a queue for load-outs. It was usually a blockage of aluminium.

The action of last month fits in with a pattern that has been established over the years, where surplus aluminium is brought to ISTIM Malaysian warehouses to be subsequently cancelled and loaded again.

RUSSIAN RIDDLE

The warranting action taken at Port Klang last month should have been able to exhaust shadow stocks in the Malaysian port.

Port Klang had almost 687.500 tons of "off-warrant", as the LME calls it, at the end April. This is metal that's being stored in a warehouse agreement with the option to receive full LME delivery. That option was called out last month.

The question remains, however, whether the LME will receive any unsold Russian aluminum produced before the 12th of April.

In May, the amount of Russian metal stored in LME sheds rose from 116 325 tons to 246,950 tonnes. In its monthly origins reports, the LME only includes warranted inventories. The increase in May was due to re-warranting and not new warranting.

The LME revised its Russian warranting regulations to prevent traders from gaming the sanctions. As a result, nearly 89,000 tons previously cancelled Russian metal was re-warranted in Gwangyang. This helped to increase the total amount of metal on-warrant.

Since the middle of April, there have been no deliveries to warrant at the port. The exchange's network has only seen 1,875 tonnes of Russian metal that was produced before April 12, but had not been previously stored in the LME system.

TOO MUCH ALUMINIUM?

The market for aluminium is huge. The global market for copper is twice as large with a primary production of 70 millions tons per year.

This is a sector that can be prone to excessive production, high inventories and the need for stock financiers.

Warehouse arbitrage is often more important to LME pricing than physical arbitrage because storage costs are a key factor in the stocks-financing trade.

This is especially true if you have a large amount of inventory, which seems to be the situation right now.

The person who dumped all that aluminium on the LME believed there was more money to make in a warehouse transaction than on the physical market.

Some may disagree, but it is worth noting that despite the fact that 47% of LME's warehouse stocks are now cancelled and awaiting physical loading-out, nearby spreads have expanded into super-contango terrain.

The benchmark LME Cash-to-three months period Closed Monday, valued at $63 per ton. This is the largest contango since at least 15 year.

This suggests that there are still many metals hanging over the LME market, and there could be more surprises in store.

The author is a Reuters columnist (Editing by David Evans).