The fee buyers pay to obtain aluminum in the U.S. rose to a record this week as demand improved and financial contracts locked up more metal.
The so-called Midwest spot premium rose to 11 cents to 12 cents a pound, a record, Metal Bulletin reported today, citing unidentified traders. The surcharge is added to the price of aluminum for immediate delivery on the London Metal Exchange. The fee climbed 48 percent over the past year, according to Metal Bulletin data available on Bloomberg.
As much as 80 percent of the metal is locked in financing arrangements and not available to consumers, according to Credit Suisse Group AG. Buyers have to wait more than a year at some locations to get metal out, based on LME rules on deliveries. Alcoa Inc. (AA), the biggest U.S. producer, forecasts 7 percent demand growth this year after a 6 percent gain in 2012.
“Clearly rising premiums is a consequence of stock financing,” Lloyd O’Carroll, an analyst at Davenport & Co. in Richmond, Virginia, said by phone today. “Demand is rising, not falling and financing is continuing to attract metal into warehouses.”
Aluminum stockpiles monitored by the LME climbed to a record 5.24 million metric tons on Dec. 21. Inventories have doubled since 2009, according to data compiled by Bloomberg.
The financing transactions typically involve a simultaneous purchase of metal for nearby delivery and a forward sale to take advantage of a market in contango, when contracts with later delivery months cost more than nearer-dated metal. Borrowing and storage costs influence their profitability.
Many institutions that do financing own warehousing firms, according to Deutsche Bank AG. Premiums in the U.S. and Europe will stay high as long as interest rates in western nations remain at low levels, encouraging financing transactions, according to Daniel Brebner, an analyst at the bank in London.
“The price distortions that this has created in certain markets, such as industrial metals, are likely to be sustained,” Brebner said in a report Jan. 8.
Traders engaged in inventory financing have booked metal at LME warehouses to move it into their own warehouses and reduce costs, O’Carroll said.
Orders to withdraw the metal from LME warehouses jumped to a record 2.24 million on Dec. 28 on bookings in Detroit and Vlissingen, the two biggest locations for LME aluminum. It may take as long as 75 weeks to withdraw metal from Detroit, which holds about 28 percent of total aluminum stockpiles, according to data compiled by Bloomberg.
The premium in Europe including duty climbed to $290 to $305 a ton (13 cents to 14 cents a pound) this week, Metal Bulletin reported today.
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