Where Do We Put This Stuff?

by Dave Forest
April 9, 2010

A couple of interesting data points the last few weeks, on commodities oversupply.

Last week CBI China reported that Chinese base metal stockpiles are reaching epic levels.

CBI surveyed commercial warehouses in Shanghai plus three other provinces and found that metals inventories have continued to bulge. All told, 965,000 tonnes of aluminum and zinc are now held in storage across China.

That's phenomenal inventory growth over the last few months. At the end of 2009, stockpiles stood at "just" 626,000 tonnes. We're up over 50% in a single quarter.

And CBI expects inventories to keep rising, noting "We'll have 1 million-tonne inventories in the near future."

This is obviously a concern for anyone investing in these metals. How will this supply eventually be absorbed back into the market? Can it be done with disrupting prices?

The petroleum industry is also show signs of too-much-ness. This week Total announced the start-up of the second train at its Yemen LNG project.

The Yemen project's first train went into operation last October. The commissioning of the second train will now allow the facility to reach its full production capacity of 6.7 million tons per year.

This is just one of several LNG projects coming on-line in the next couple of years. All of these projects were conceived years ago. When the global gas market looked very different.

Back in those days, it was assumed America would be the "go-to" market for LNG. U.S. domestic gas production appeared to have peaked, and imports from Canada and Mexico looked ready to sag. This was a nation that would take any gas the world could send its way.

Then came shale gas. U.S. gas production is now up for the first time in a decade. Throw in demand reduction forced by the recent recession and it looks as if over-, not under-supply may be America's issue.

Begging the question: where will all of the new LNG developments sell their gas? The answer seems to be Europe, with an increased number of cargos landing in the U.K. recently.

But there's only so much gas the European market can absorb. And Russia is now moving to lower its European import prices, in order to compete with LNG. As with base metals, it looks like there could be a lot of gas supply with nowhere to go.

The takeaway: we're living in a commodities world still adjusting to the post-financial-crisis world. There could be some supply-side surprises lurking in the wings.

Here's to clearing out inventory,

Dave Forest