United Co. Rusal, the world’s biggest aluminum producer, said physical premiums will continue to rise in the next 12 to 18 months as so-called financing deals tie up metal stockpiles and demand grows.
About 65 percent of aluminum stockpiles monitored by the London Metal Exchange are locked in financing deals and aren’t available to consumers, said Steve Hodgson, Rusal’s director for international sales. Supply disruptions and production cuts have exacerbated the market tightness, he said.
“Premiums may fall if demand should significantly reduce, or if a rise in interest rates makes financing deals unprofitable,” Hodgson said in an e-mailed response to questions Aug. 7. “Neither scenario looks likely in the next 12 to 18 months and we would expect to see premiums continue to strengthen during this period.”
Premiums paid on top of the LME price have rallied to a record in Europe, the U.S. and Japan as low interest rates fueled demand for financing deals, according to Morgan Stanley. These transactions 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 dates trade at higher prices than nearer-dated metal. Immediate delivery aluminum traded at discount of $37.25 a ton to the three-month contract today, the widest contango since June 28.
This year premiums in Europe have gained 83 percent to $200 to $210 a ton, duty unpaid, and those in the U.S. are up 43 percent at 10.75 cents a pound, both at records, according to Platts, a unit of New York-based McGraw-Hill Cos.
Aluminum for three-month delivery fell 0.6 percent to $1,904 a ton by 11:41 a.m. on the LME. The metal used in everything from aircraft to beverage cans dropped to $1,832.25 a ton on June 27, the lowest price since June 7, 2010.
“The Western markets are being very strongly influenced by the absence of physical material,” said Peter Richardson, chief metals economist at Morgan Stanley in Melbourne. “But the cash price is indicating clearly that the market is in surplus on a recurrent basis despite production cuts, and is probably going to continue to reflect that in a weaker cash price.”
About 5.4 million tons of aluminum capacity is loss-making at the current LME price, Hodgson said. The amount falls to 4.76 million tons if premiums are taken into account, he said.
Rusal expects producers around the world to cut about 4.5 million tons, or 8.7 percent of global capacity, before the end of the year, Hodgson said. Smelters outside China have so far shut about 1.49 million tons of aluminum capacity since the start of the year, with another 150,000 tons of cuts expected before year-end, he said.
“The main difference from 2008-09 is that the physical demand remains firm in all regions except Europe,” Hodgson said. “Metal consumers have previously destocked and have stronger balance sheets than in 2009, hence we are seeing stable demand rather than the boom-bust liquidation of stocks that defined the previous crisis.”