United Co. Rusal, the world’s biggest aluminum producer, said elevated premiums are supported by demand and financing deals as the London Metal Exchange tries to ease backlogs in its warehouses that drew complaints from users including MillerCoors LLC.
The LME, which oversees more than 700 warehouses worldwide, proposed rules last month to cut waiting times for withdrawals at some sites. Premiums paid by aluminum users rose in recent months as warehouse operators offered incentives to attract the metal into storage, forcing consumers of the lightweight metal to compete. Analysts from Barclays Plc to Macquarie Group Ltd. and Credit Suisse Group AG have forecast premiums to drop if the LME implements proposed changes.
“Apart from the implied role of warehouse practices driving up premiums, Rusal firmly believes that the broader industry context is greatly supportive of the premiums paid in the market today,” Steve Hodgson, Rusal’s director for sales and marketing, said in an e-mailed comment to Bloomberg. “Aluminum premiums are high because there are alternative buyers for the metal other than Western world consumers.”
Financing arrangements are yielding a profit of 4 percent to 5 percent a year and and may remain at current levels, Hodgson said. As much as 80 percent of aluminum tracked by the LME is tied up in financing deals, according to Societe Generale SA. Financing typically involves the purchase of metal for nearby delivery and a forward sale to take advantage of a market in contango, where prices rise into the future. The transactions are being helped by record-low borrowing costs after central banks cut interest rates to boost economic growth.
“As long as cash-and-carry deals remain attractive, aluminum will continue to be drawn into low-cost storage locations and locked for as long as the contango supports the trade,” Hodgson said. Contango is currently providing sufficient incentive to enter new financing deals through to December 2014, he said.
Aluminum for three-month delivery fell 0.6 percent to $1,798 a ton by 4:25 p.m. on the LME, down 13 percent for the year. Metal for immediate delivery traded as much as $47.75 a ton lower than the contract for delivery in three months on July 31, the widest contango since 2008.
Premiums in Europe and North America have been falling in recent weeks because of seasonally slower demand and because some stock holders started to reduce positions on expectations of changes in the LME rules, Hodgson said. The LME proposed obliging warehouses where withdrawals take more than 100 days to deliver out more metal than they take in. The proposed rules will take effect April 1 if they’re approved by the exchange’s board.
The surcharge, added to the price of immediate-delivery aluminum on the LME, fell to $250 to $275 a ton in the past week in Rotterdam from $270 to $295 in June, the London-based researcher CRU said last week. The premium last touched $250 in July 2012. Rusal achieved a record-high realized premium on its metal in the first quarter of $264 a ton, according to a presentation on its website. Premiums may decline another 25 percent by year-end, Barclays said in an Aug. 1 report.
While some analysts have forecast a drop in premiums, drawing an analogy with 2010, when waits in Detroit and Vlissingen warehouses were 100 days, it would be “misleading” to make such a parallel, Hodgson said. The aluminum market, excluding China, will have a deficit of 200,000 metric tons, compared with a 660,000-ton surplus in 2010, Hodgson said. About 800,000 tons of aluminum capacity closed or was disrupted since the start of the year, and the number will rise to almost 1 million tons by the end of 2013, he said.
“The market will remain very tight for the foreseeable future, with additional uncontracted fresh production likely to be sold directly to consumers who have continued to purchase directly from smelters throughout the period of time that queues have formed,” he said.
Consumers led by brewer MillerCoors told a U.S. Senate hearing last month that banks and other warehouse owners are using “unfair” LME rules to slow deliveries. Rusal is still preparing its submission to the LME regarding the proposed change and will share it with the exchange in “due course,” Hodgson said.