Singapore's massive metal inventory triggers a rare battle for warehouses: a risk or an opportunity?

Refined zinc and lead have been pouring into Singapore since the middle of last year, making one of the world’s smallest countries a vital vault for companies including Trafigura Group and Glencore Plc.

While Malaysia and South Korea have cheaper LME warehouses, Singapore has set up warehouses in expensive areas. Industry insiders can't help but wonder: Is the battle for warehouses in Singapore a risk or an opportunity?

Total stocks of the two base metals in LME-registered warehouses in Singapore have risen more than tenfold since May 2023, reaching a record high of nearly 430,000 tonnes in recent weeks, according to the exchange’s latest data. This is partly due to the global economic slowdown and rising global bets on a U.S. recession.

Singapore has been a major hub for base metals for decades. At Jurong Island off the southwestern coast of Singapore and Sembawang in the north, piles of metal can sit for years or be quickly transferred to ocean-going vessels when needed.

At current levels, Singapore’s accumulated inventory would require about 140,000 square meters (35 acres) of storage space, a large area for land-constrained Singapore, where warehousing, transportation and labor costs are relatively high.

Singapore’s move to build warehouses in pricier locations amid cheaper LME warehouses in Malaysia and South Korea may have more to do with a trading strategy that allows some companies to benefit from higher storage costs associated with the city-state than with demand volatility.

Aluminium Sheet Stockists in Singapore

Rent-sharing transactions

In February this year, the three parties reached a consensus to further promote the feasibility of establishing a joint venture for the production and sales of aluminum plates. According to people familiar with the matter who wish to remain anonymous, due to the high storage costs, traders are increasing their income by signing lucrative "rent sharing" agreements with metal warehouses.

Such agreements, more commonly used at copper and aluminum warehouses in other countries, allow trading companies to share about half of storage costs. But they also come with financial risks for warehouse operators.

To attract traders to their warehouses in Singapore, operators have not only agreed to share part of the storage costs but also offered financial incentives worth up to $50 per tonne to lure metal into their facilities.

Typically, warehouses know they can pass those costs on to customers who ultimately buy metal from the warehouses. But if traders decide to move their inventory to other warehouses in the country or region — in some cases to get a bigger share of the rent — there are no customers to compensate warehouse operators for their sunk costs. They lose both the incentives they paid and the repayments for the shared rent.

The "tacit understanding" of warehouse operators

Historically, warehouse operators have had a tacit understanding that they would not try to drive down each other’s business in this way. But when traders decide to change where to store metal, warehouses have little choice but to comply.

It’s not just Trafigura and Glencore that are pushing this model for metal storage. Citigroup Inc.’s strategy is not wrong, but it does introduce new risks to warehouses, according to people familiar with the matter.

Moreover, using Singapore as a storage hub would divert some of the global metal supply away from countries outside Asia that might also need the metal, pushing up prices in other parts of the world.

Trafigura, Glencore and Citigroup declined to comment.

The London Metal Exchange (LME) said in an emailed statement that it has a comprehensive set of warehousing rules, including restrictions on “evergreening” rent transactions. The rules were introduced in 2019 to protect warehouses from incidents where parties buy metal warrants purely to extract post-sale financial rewards.

The bleak outlook for metals demand means the risk to warehouses is not going away. Industry veteran Henry Pang said that while there are other storage locations in Southeast Asia, Singapore's location and established base of traders and banks means it can provide sufficient liquidity for these stocks, both financially and logistically.

Pang, who helped set up the first LME warehouse in Asia in Singapore in the 1980s, said storing the metals in Singapore was the best option for traders.