When carmakers, can manufacturers or telecom companies need to buy metals such as copper and aluminum, they pay a premium to market prices set on the London Metal Exchange to reflect the cost of getting raw materials when and where they want them.
Those premiums, while a small percentage of the cost of metals, are vital for commodity traders, who buy from producers and sell to end users. In recent months those margins have plummeted, threatening profits at traders including Glencore Plc and Noble Group Inc.
Take aluminum. A growing oversupply in China, the top producer, coupled with new rules about releasing stockpiles from LME warehouses have left traders with unsold inventory and premiums have collapsed. Here's what's happened in Europe this year:
And this is the same chart for the U.S.:
Traders, who loaded up with metal when premiums were higher, are feeling the impact of the slump, according to Uday Patel, manager for aluminum markets at Wood Mackenzie Ltd. in London.
"Trading houses are all suffering the same pain. The market has moved so rapidly and they have been caught in the market that's run against them."
Two of the largest traders of aluminum are Glencore Plc, the miner and trader headed by billionaire Ivan Glasenberg, and Noble Group Ltd. Other prominent players include Trafigura Beheer BV and Koch Supply & Trading.
Net income at Noble, Asia's biggest commodities trader, declined in the three months ended June as the as the mining and metals division swung to a $50 million loss. That included an operating loss of $19 million from supply chains, paring the unit's first-half operating income to $74 million.
At Glencore, the trading business is at risk of missing its earnings target for this year as a glut of global metal supply reduces the premiums, according to analysts at Liberum Capital Ltd.
Here's what Noble CEO Yusuf Alireza had to say on an earnings call earlier this week:
"The falls that we saw starting in the first quarter and accelerating in the second quarter, I think were the biggest falls in premium that we have seen in such a short period of time in recent history, if not ever."