Most of these mountains of metal are increasingly being tied up in financing deals or locked away by companies such as bank Goldman Sachs and trader Glencore. The bigger metals inventories grow, the less is available to make things.
A pattern that first emerged in abundant aluminium and then zinc is spreading to other metals such as copper and nickel.
It means that if demand picks up in the world's biggest metal consumer, China, consumers everywhere will be forced to pay up as they scramble to obtain supplies.
Total inventories of the six major industrial metals in warehouses monitored by the London Metal Exchange (LME) - also including lead and tin - have grown by over 10 percent to 7.2 million tonnes since July.
Stocks of benchmark metal copper in sheds registered by the LME, the world's biggest metals marketplace, have nearly doubled over the past four months to the highest levels since November 2011.
Of total LME stocks, however, probably less than 15 percent are available to consumers, said Wiktor Bielski, head of commodities research at VTB Capital in London.
"There's over 7 million tons of metal on the LME and that's way higher than we've ever seen, but the actual stocks position around the world is nowhere near as fluid as the numbers would suggest," he said.
"When demand starts to pick up, and consumers see those big warehouse numbers and think 'I can go to the LME and I can get what I need', they're not going to be able to get it."
Concentration in Few Hands
The scant availability is due to a combination of extensive deals that earn cash by locking metals up as a financial investment and to LME rules that allow backlogs to build up, earning rents for warehouse owners as metal gathers dust.
Metal stocks have been concentrated in a handful of LME warehouse locations controlled by big banks and trade houses.
Nearly half of all LME stocks are in only two locations, Detroit in the United States and Vlissingen in the Netherlands, and two thirds of inventories are in four cities.
Warehouses in Detroit are largely owned by U.S. bank Goldman Sachs and those in Vlissingen by trade house Glencore. Other major metals storage centers are controlled by bank JP Morgan and trade house Trafigura.
Once fund investors see that consumers are scrambling for metal and paying ever more to obtain it, they may pile in and send prices ever higher. This could lead to futures market prices for nearer delivery exceeding those for some dates further forward in a pattern known as a backwardation that is seen as a sign of tight supply.
"If you start to see consumers really being pressured and you see fund money coming in, that's the mechanism that Glencore, JP Morgan, Goldman Sachs and Trafigura have been waiting for," said an industry source who declined to be named.
"Because that's why they've locked the metal up - when the tightness is really going to come, the backwardations are going to be flaring and prices are going to be rising."
While none of the six metals are in a backwardation along the main part of their futures curves, the lack of supply has squeezed certain months, which analysts say is a modest preview of what may be in store.
In aluminium, for example, a limited backwardation has emerged with June at a $20 premium to July.
Analysts estimate about 6 million tons of LME stocks are in financing deals or tied up in warehouse backlogs and physical supplies have become more difficult to source in recent months.
Financing Deals Spread
The deals started in aluminium, where banks found that they could borrow money at rock-bottom interest rates, buy metal and immediately sell it at a profit for delivery in one or two years time, storing it in the meantime.
The deals spread to zinc and have recently started popping up in nickel and copper, traders said.
"We do see Asian clients looking for nickel, but it's more for financing than any fundamental pick up in demand. In regards to the flows were seeing, it's fairly regular," said a trader who specializes in LME inventories.
In a linked development, LME warehouse backlogs initially developed in aluminium but now involve most of the metals.
Under LME regulations, big warehouses such as Vlissingen, which has 1.56 million tons of aluminium, are required to deliver only 3,000 tons per day, creating huge log jams.
The waiting period to access aluminium is over 14 months at Vlissingen and 16 months at Detroit.
Other metals are getting caught up as new deliveries of copper, lead, and nickel are stashed away in the big warehouse locations, placing them behind the already long queues.
Vlissingen, for example, has nearly 47,000 tons of lead and about 10,000 tons each of copper and nickel.
The LME, bought last year by Hong Kong Exchanges and Clearing, will require warehouses starting in April, to deliver 500 tons a day of other metals trapped behind queues. Traders say this will have only a modest impact.
"I think that the overall profit dynamic is evolving... certainly the profitability of warehousing remains quite strong and I suspect that is increasingly the driver for queue builds in whatever metals and in whatever warehouse," said Deutsche Bank analyst Daniel Brebner.
The backlogs have sent some premiums, which consumers pay on top of LME prices to get quick deliveries, rocketing to record levels as buyers hunt for accessible supply from outside the LME system, which is meant to be a reliable fall-back source.
"Whereas the LME still bills itself as the market of last resort, what you're seeing is all the physical activity is being done away from the exchange," the stocks trader said.
"People are very much paying through the nose for just-in-time deliveries instead of relying on the LME stocks." (Reuters)