U.S. Aluminum Premium Surges as Financing Limits Supplies

The premium buyers pay for aluminum in the U.S. surged 11 percent in the past week as demand for financing transactions limited the availability of the metal used in everything from beverage cans to aircraft.

The charge in the U.S. Midwest, added to the price of aluminum on the London Metal Exchange, rose to a record 14.75 cents a pound on Jan. 3, according to Harbor Intelligence, an Austin, Texas-based researcher. That compares with 13.75 cents the day before and 13.25 cents on Dec. 31, Harbor’s data show. The surcharges are set to reach all-time highs in the next few weeks in Europe, Asia, Mexico and Brazil, it said in a report.

Premiums are jumping even after the LME, the world’s biggest industrial-metals marketplace, moved to ease a delivery backlog at its network of licensed warehouses with the aim of reducing the charges. Supplies are limited after smelters outside China, the biggest metal producer, curbed output and restricted scrap availability helped demand for primary metal, according to Wood Mackenzie Ltd., an Edinburgh-based consultancy. Financing activity is still profitable, says CRU, a London-based researcher.

“Financing is still attractive,” Marco Georgiou, an analyst at CRU, said by telephone today. “Traders are able to finance the metal. If they’re able to hold on to that metal and to finance it, that helps to drive up the premiums.”

Borrowing Costs

Financing deals typically involve buying metal for nearby delivery while making a forward sale to benefit from a market in contango, when prices rise for future deliveries. The spread, rent charges and borrowing costs affect the transactions’ profitability. Aluminum for immediate delivery settled at a $47.25-a-metric-ton discount to the contract for delivery in three months on the LME, against $27.25 at the start of June.

“Buyers can’t really find metal at 12 cents a pound,” Jorge Vazquez, the managing director of Harbor, said in the report. “Traders/producers are practically not willing to sell metal at premiums lower than 14.75 cents a pound Midwest.”

Limited supplies of aluminum scrap have been “amplified by the really bad weather in the U.S.,” according to Vazquez. Consumers of aluminum have kept very low stocks and are coming back to the market, said Edgardo Gelsomino, an analyst at Wood Mackenzie in London.

“It’s a sellers market,” Gelsomino said by phone today. “The market is clearly tight. Premiums are a reflection of this tightness. We had some smelter closures in the U.S., Europe. That’s definitely affecting the balance outside China.”

Aluminum for delivery in three months rose 0.3 percent to $1,778 a ton by 5:26 p.m. on the LME. Prices dropped 13 percent last year, the second annual retreat in three.

Some LME warehouses will be required to ship out more metal than they take in as of April 1, the exchange said in November. Consumers of aluminum complained that long waits for withdrawals from some locations pushed up their costs.