European aluminium market participants are increasingly of the opinion that premiums will not fall significantly following the implementation of the London Metal Exchange’s new load-out rules in April, throwing 2014 contract talks into further uncertainty.
Premiums fell after the LME announced the changes in July, and many people expected premiums to keep falling through the second half of the year. But the continuing attractiveness of warehouse financing deals has kept aluminium tight in Europe and premiums have since rebounded.
Metal Bulletin’s European duty-paid aluminium premium is $250-270 per tonne, while duty-unpaid metal stands at $190-210 per tonne.
The consensus remained that premiums would fall after the rules were implemented next year, but a growing number of people in the market no longer see this eventuality.
“I’m still bullish,” a producer said. “This is not the end. [Premiums will rise] beyond April next year.”
Though the growth of financing deals in LME-listed warehouses could be curtailed by the new rules, those deals will continue to pervade off-warrant warehouses in 2014.
“The contangoes are huge and interest rates are nearly zero,” the producer said. “The only difference between now and before is that now the financing will be done in off-warrant warehouses.”
European premiums will also be supported by tight supply next year, according to market sources who say that comparatively higher premiums in the USA and Asia will see more material directed away from European markets.
“The US is at 10.25 cents [per lb, $226 per tonne] and the Main Japanese Port premium is even more. This is duty-unpaid, in countries where metal is actually available,” the producer said. “Even if you did want to move metal to Europe the freight would kill you. European premiums will not fall in Europe unless there is another major recession.”
Producers pushed for floating-rate premiums in their contracts last year after spot premiums had climbed to record highs, setting a precedent for altering the traditional structure of primary aluminium contracts to take advantage of forecast premium movements.
But with all the uncertainty over where premiums will go next year, some producers are now just happy to fix premiums at current levels for at least the first quarter of next year.
“We’ve done sizeable deals for the first quarter at around $265 [per tonne],” a second producer said, adding that the length of contracts is mostly determined by the consumers.
“Some consumers will only buy a few months ahead because they only have a few months’ horizon,” a second producer said, meaning that those consumers can only project their own customers’ requirements a few months ahead, and so do not wish to commit themselves beyond that.
“Other customers look at the way premiums have gone all the way to $300 and down to $230 this year, and are scared they’ll get it wrong if they go beyond the first half,” he added.