According to a report published today on the Wall Street Journal, "the world's metal is slipping into the shadows.
Banks, hedge funds, commodity merchants and others are stashing tens of millions of tons of aluminum, copper, nickel and zinc in a hidden system of warehouses that span the globe.
These facilities are known to some in the industry as "shadow warehouses" because they are unregulated and don't disclose their holdings.
They operate outside the London Metal Exchange system of warehouses, the traditional home for these metals".
As of October, a record seven million to 10 million tons of aluminum were being housed in these facilities, in countries as far apart as Malaysia and the Netherlands, according to estimates from several analysts.
The amount dwarfs the 5.5 million tons of aluminum in the LME-licensed warehouses, based on LME figures as of Tuesday. Just 12 months ago, the figures were about equal.
A similar shift is taking place with other industrial metals, analysts say.
As a result, producers and consumers are bracing for potentially wild swings in metals prices as market participants have difficulty accurately gauging supplies of these metals. With no clear insight into how much metal is in the shadow system, setting prices will become increasingly difficult, they say.
Turbulent raw-materials prices can make it more expensive to produce everyday goods when prices spike or limit output from mines and smelters when prices drop below their cost of production.
The lack of transparency is making this shadow system increasingly attractive to institutions seeking to profit from information that other buyers and sellers don't have. Some companies also are seeking a cheaper alternative to the LME warehouses, which can be 10 times as expensive as the unregulated storage, analysts and traders say.
However, metal owners can face higher interest rates from banks if they wish to use metal stored in shadow warehouses as collateral for loans, because banks see the LME system as less risky, analysts say.
Five companies operate 75% of the LME's 778 licensed warehouses. All own shadow facilities as well, people familiar with the companies said.
In some instances, a single firm runs licensed and unlicensed warehouses in the same building, with the metal counted by the LME separated from hidden stockpiles by a chain-link fence, said David Wilson, a commodities analyst with Citigroup.
