Premiums paid for aluminum in Europe and North America are set to extend gains to records in 12 months as financing transactions tying up inventories keep buyers waiting as long as a year for deliveries.
The fee in Rotterdam, excluding duties, will rise 17 percent to about $240 a metric ton on top of the price of aluminum for immediate delivery on the London Metal Exchange, according to the median estimate of 11 traders and analysts surveyed by Bloomberg News. The U.S. Midwest premium will climb 20 percent to about 13 cents a pound ($287 a ton).
“Metal has been withdrawn from the physical market into warehouse financing,” said Lloyd O’Carroll, an analyst at Davenport & Co. in Richmond, Virginia, who has tracked the market for three decades. “We should expect more metal to go into warehouse financing.”
Fees doubled in Europe this year to $200 to $210 a ton and jumped 46 percent in the U.S. to 10.8 cents a pound, both records, according to Platts, a unit of McGraw-Hill Cos. As much as 75 percent of inventories monitored by the LME are tied up in financing transactions, Citigroup Inc. estimates.
Premiums will keep rising for 12 to 18 months because of financing deals and warehousing queues, according to United Co. Rusal, the world’s biggest producer.
Withdrawing the lightweight metal from Detroit, the biggest aluminum inventory, may take as long as 49 weeks and the waiting time in the Dutch port of Vlissingen may be as long as 56 weeks, Bloomberg calculations show. The two locations account for 52 percent of the 4.89 million tons of aluminum in LME-monitored warehouses.
The LME revised its delivery rules in April, doubling so-called load-out rates to 3,000 tons a day for warehouse companies storing more than 900,000 tons at a single location. The exchange has reconvened a steering committee before a six-month review of the daily rates.
“The LME has failed to date to resolve the warehousing issue,” said Nick Madden, senior vice president and supply-chain officer at Atlanta-based Novelis Inc., which processes about 3 million tons of aluminum a year. “The existence of long queues permits the warehouse owners to offer ever-increasing incentives to primary producers, and this continues to put upward pressure on premia.”
Aluminum for three-month delivery fell 0.3 percent to $1,851 a ton by 3:10 p.m. on the LME. Prices are down 8.4 percent this year. Supply will outpace demand by 370,000 tons in 2012, Morgan Stanley estimates.
A financing transaction involves 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. Low interest rates help make the accords profitable.
Aluminum for delivery in 15 months, or November 2013, closed yesterday at $1,962 a ton on the LME, $100.50 a ton more expensive than the three-month contract.
“There is still a reasonable contango to make money,” said David Wilson, an analyst at Citigroup in London. “Interest rates are pretty much zero.”