Metal Bulletin – by Jethro Wookey
London 26/10/2016 – European aluminium sellers are readying for a busy LME Week, with large volumes of business expected consumers adopt a more conservative buying strategy for 2017.
“We’re expecting a very, very busy LME Week, particularly for P1020 ingot,” a producer said. “We’ll book about 65% of our P1020 volumes during or just before LME Week.”
LME Week falls later in the year than normal this year but lands right in the middle of 2016’s extended mating season.
“The next two weeks are very important. We’re right in the heart of the season,” the producer said.
For their part, aluminium consumers are looking to strike longer-term supply deals for 2017 than in 2016. This buying strategy will offer fewer opportunities to traders than before.
“That part [of our aluminium needs] which is coming via dealers is getting smaller, and it will be that way for 2017 as well,” a consumer said.
Aluminium buying has been more complicated over the past few years – companies have had to decide whether to buy forward or wait for further market developments and whether to buy on fixed-premium or floating-premium deals, all on price and premium forecasts that largely turned out to erroneous.
But now that premiums and prices are perceived to be entering a more stable – and more recognisable – phase, buyers are returning to a more conservative, longer-term buying strategy.
“We’ve been buying on a quarterly basis but we’re looking to buy on a six-monthly basis now, with larger volumes,” a second consumer said.
MORE CONSERVATIVE BUYING STRATEGY
The structure of a typical downstream aluminium consumer has changed in recent years in terms of how its buying is done and also who is doing the buying; consequently, a more conservative strategy is emerging.
More will be booked on long-term deals than in 2016; of the volumes that are left over, more will be bought on formula-based deals – with premiums set via a benchmark such as the Metal Bulletin premium. This leaves much less room for manoeuvre for traders to make a profit between their purchase price and the price at which they sell to consumers.
The question remains whether to book long-term deals on a fixed premium or floating premium basis. Guarding against future premium rises or capturing the benefit of future premium falls is something that consumers have done with spectacularly mixed results in recent years.
Many sellers are not willing to sign fixed-rate deals.
“We have quite a few enquiries for full-year deals with fixed premiums but I’m hesitant,” a producer said. “It’s a risky game I’m not willing to play.”
Others have been willing, thereby have locked in a great deal of business.
“We’re offering fixed premiums and we already had a lot done for the first quarter two months ago,” a second producer said. “There’s more demand for fixed premiums right now.”
The number of suppliers offering fixed-rate deals is unlikely to increase – the consensus over the past several weeks has been that aluminium premiums are ebbing.
“People have started to realise that we’re at a low point,” a trader said.
Additionally, few expect a repeat of the volatility in premiums of the last few years. This could encourage suppliers to accept fixed-rate deals or it could encourage buyers to accept floating-rate deals.
“Last year the premiums were shooting up and we were trying to lock in a number because there were such high levels and big swings,” the second consumer said. “Now it won’t move more than $5-10 in a month so there’s less reason to fix.”
Those that have managed to buy on fixed-rate contracts have generally done so above current spot premium ranges.
“Europe is concerned about metal availability and that is being priced in,” the second producer said. “[Premiums for] fixed deals are above the spot levels.”
Buyers, now so much more risk-averse, may be moving towards a strategy that resembles the old producer-pricing model, albeit with prices provided by independent assessments rather than direct counterparties.
“It does appear that we are synthetically migrating to a system that is not producer-price controlled like on the past,” a hedge fund source, speaking in August, said. “It is still different but it sure does walk and talk like some of the older producer price control market ways.”
If such a trend eliminates much of the need for traders to act as middlemen, it may not be a long-lasting situation.
“Fortunately, when the world becomes so risk adverse, those actions will create fragility and ultimately another paradigm shift will happen,” the hedge fund source said. “Until then, there are few traders that will be taking risks like we have seen in the past.”
This artcle first appeared on Metal Bulletin.