COMMENT FROM MB 27th AL CONF: No losers in the aluminium premium game

Record high premiums are the main topic at the Metal Bulletin 27th Aluminium conference in Moscow this week, but nobody is moaning too loudly, because there are no real losers.

Record high premiums are the main topic at the Metal Bulletin 27th Aluminium conference in Moscow this week, but nobody is moaning too loudly, because there are no real losers.

It would probably take a plant closure at a major aluminium consumer such as Coca Cola or Novelis, or complaints that they could not get metal, to spur any action to stop the physical pricing phenomenon that has taken the market by surprise.

But that has not happened. Consumers are passing the extra costs onto customers, with Joe Public footing the bill for all the extra costs involved in the manufacture of cars, planes and iPads.

The speed of the rise in premiums, which have skyrocketed in recent days, has been astonishing. After creeping steadily higher over the past year or so, the increase has accelerated with duty-paid premiums in Europe now nearing $300 per tonne at the same time as London Metal Exchange prices are still very weak.

Rio Tinto Alcan ceo Jacynthe Cote told the conference that at a price of $1,900 per tonne, over 30% of global aluminium smelting capacity is under water.

UC Rusal said it expects to see the removal of up to a further million tpy of production capacity from the market by the end of the year because that output is cost inefficient.

The figure would be far, far higher if premiums were not providing roughly 10% of the producers’ revenue these days.

Production cuts are not happening
Yet the much-needed production cutbacks are not happening, and some smaller producers are privately talking about bringing marginal capacity back on stream because the revenue from the premiums means that they can just about afford to do so.

This sounds incredible, when all the main producers have emphasised in the past 24 hours is the need for discipline about supplies to be maintained.
So if the producers and consumers aren’t suffering, what about the banks and merchants in between?

They’re more than happy: the lucrative financing deals that squirrel away vast tonnages of metal into warehouses have left them rubbing their hands in glee.

The only ones whinging are those that aren’t involved in the physical market, who have missed the gravy train that financing deals have become.

Warehousing deals tie up metal 
The volume of metal tied up in warehousing deals is huge. Official LME warehouse stocks are nearing 5 million tonnes, while the amount being held off-warrant is estimated to be more than twice as much again – it’s impossible to know. Financing deals aren’t going anywhere soon either, as the low interest rates and market contango make them far too attractive.

And then we come to the warehouses. Once the poor relation to the rest of the industry, warehouse firms are now probably the metal world’s most financially successful segment. They earn huge sums in rent, and the queues to take metal out of locations are helping them to even more. But that’s a whole other story.

The industry has no need to complain. The situation isn’t right, because everybody recognises that premiums at current levels don’t accurately reflect the underlying physical market. But it isn’t wrong either, because nobody has broken any existing rules and they’re making lots of money out of it.

The metals community will continue to enjoy high premiums for some time to come. A sustained, demand-based backwardation is the only thing that can spoil the party.

And that’s not on anyone’s horizon right now.

Andrea Hotter
Twitter: @andreahotter