Aluminum Warehouse Orders, Premiums Signal Scarcity of Metal

Rising orders to draw aluminum from warehouses and higher premiums for the lightweight metal signal a tightening market even as London Metal Exchange stockpiles remain near February’s record high.

Thirty-three percent of aluminum inventories monitored by the LME are awaiting delivery from warehouses, daily exchange figures show. The orders rose to a record 33.5 percent of stocks on March 9. Premiums are up 27 percent this year in Europe (MBALFMEP) and 19 percent in the U.S. (MBALAL01) LME inventories come to 5.05 million metric tons, less than 2 percent below the record.

Almost 75 percent of LME aluminum stocks are locked into so-called financing transactions and unavailable to consumers, according to Deutsche Bank AG. Shipping backlogs in LME warehouses have left consumers struggling for supplies, Citigroup Inc. said today. Alcoa Inc. (AA) this month stuck to its forecast for world aluminum demand to climb 7 percent in 2012.

“The aluminum price may remain relatively well supported because of the tightness in the physical market,” said Michael Widmer, a London-based analyst at Bank of America Merrill Lynch. “The demand side doesn’t look all that bad.”

The U.S. Midwest premium for aluminum, added to the price of immediate-delivery metal, rose to a 26-year high of 9.15 cents a pound, according to researcher Platts. Widmer favors aluminum, used in products from beverage cans to aircraft, over copper because of the market’s tightness.

Forward Sale

The financing accords have tied up stocks because of the market’s contango, when contracts with later dates trade at higher prices than nearer-dated metal. Investors can buy aluminum for nearby delivery and make a forward sale at the same time to capitalize on the price structure.

Aluminum for three-month delivery on the LME traded recently at a $40.50 premium to spot metal, data compiled by Bloomberg showed.

Withdrawing aluminum from the world’s second-biggest inventory, held in the Dutch city of Vlissingen, may take as long as 59 weeks at the LME’s current daily delivery pace of 3,000 tons, according to Bloomberg calculations. The so-called minimum load-out rate was doubled in April for warehouse companies storing more than 900,000 tons at a single location.

“Strict adherence to LME minimum load-out rates has created huge backlogs of material to be shipped, limiting metal availability and tightening markets and supporting prices,” Citigroup analysts Edward Morse and David Wilson said in a report. “Aluminum premiums have also risen most notably in those regions where inventory levels are highest, namely the U.S. and Europe.”

Canceled warrants account for 85 percent of stocks in Vlissingen, daily LME figures showed. That compares with 42 percent for Detroit, which has the largest global holding of aluminum at 1.41 million tons.

Aluminum for three-month delivery rose 0.4 percent to $2,078 a ton by 1:57 p.m. on the LME. The metal is up 2.9 percent this year, rebounding from an 18 percent drop in 2011. Prices may reach $2,350 by the end of this year, Citigroup said.

To contact the reporters on this story: Maria Kolesnikova in London at mkolesnikova@bloomberg.net; Agnieszka Troszkiewicz in London at atroszkiewic@bloomberg.net

To contact the editor responsible for this story: Claudia Carpenter at ccarpenter2@bloomberg.net

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