Rusal Shifts to Charging Monthly Premium, Urges Hedging
United Co. Rusal, the biggest aluminum producer, is setting the premiums clients must pay for its metal every month instead of annually as in previous years to more closely link the payments it gets to market movements.
“Rusal switched more than a half of its contracts to floating premiums starting from this year,” said Director of Strategy and Business Development Oleg Mukhamedshin. Customers should also hedge against aluminum price gains or “they may miss the right moment to hedge and lose money,” he said.
European premiums, which buyers pay on top of London Metal Exchange prices to get supplies of the metal straight away, have more than doubled to $217.50 a metric ton, excluding duty, from the start of 2012, according to Metal Bulletin data on Bloomberg. Aluminum has gained 5 percent in the same period.
Rusal sees the market in balance this year, Mukhamedshin said in an interview in Rusal’s Moscow office on Feb. 11.
“Premiums won’t be increasing significantly this year but they won’t be declining either,” he said. Rusal sets monthly rates based on a combination of average London Metal Exchange prices and average prices plus the premium from the prior month.
While banks have begun to offer aluminum-premium hedges, Mukhamedshin was skeptical of their value because of a lack of demand from producers to take the other side of the contracts.
“If a bank offers to hedge a premium for a client, at the other side it should have a producer willing to hedge the premium, too,” he said. “But producers just don’t need it. The aluminum price for any producer is a combination of the LME price with a premium.”
Consumers should instead maintain hedged long-aluminum positions, Mukhamedshin said. “As a producer we are safe but for our clients there is a potential danger,” given the large levels of stockpiles and investment demand, which may result in an increase in prices, he said.
Aluminum will rise 3.2 percent to average $2,119 a ton this year, according to the median estimate of 19 analysts Bloomberg surveyed. In comparison, Rusal sees the metal’s price reaching $2,300 by the end of the year, Interfax reported First Deputy Chief Executive Officer Vladislav Soloviev as saying last month. Aluminum gained 0.4 percent to $2,151 a ton at 12:19 p.m. in London.
The company’s forecast for balanced supply this year also contrasts with estimates of a surplus from banks including Barclays Plc, which expects an excess of 1.8 million tons.
While China will have a 500,000-ton surplus, Mukhamedshin said, Rusal expects a deficit of about 300,000 tons to 500,000 tons excluding the country. About 1 million to 1.5 million tons of production capacity may be closed this year, he said. A quarter of producers operate below output costs at prices today, while some assets have costs of $2,300 a ton, he said.
The start of new capacity outside China will be at a minimum, according to Rusal, with expansion expected at Emirates Aluminium Co. and Saudi Arabian Mining Co., or Maaden. “But Maaden won’t run at full capacity of 740,000 tons till at least 2014, while EMAL is adding 500,000 tons in 2014 only,” Mukhamedshin said.
LME stockpiles may begin to decline soon, while about 65 percent to 70 percent of the 5 million tons of inventories are locked into financial deals, according to Rusal.
“Stockpiles available for end users are close to the pre- crisis level and are falling,” Mukhamedshin said.
China’s market may also become balanced in 2014 or 2015, he said. The country plans to produce an annual 24 million tons by the end of 2015 to fully cover local demand. It made 22 million tons last year, adding 3.5 million tons to annual production.
The Asian country may be accelerating the shuttering of its inefficient production capacity, according to Mukhamedshin.
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