VIDEO: The rise and rise of aluminium premiums

Metal Bulletin's Jethro Wookey discusses the rise and rise of aluminium premiums this year, even as prices have fallen.


Metal Bulletin’s Jethro Wookey discusses the rise and rise of aluminium premiums this year, even as prices have fallen.

Severe tightness in the aluminium market has caused premiums across the world to skyrocket to record highs, driven by the huge growth in warehouse financing deals that have locked material away from the physical market. 

Premiums are set to rise further as more financial institutions plan to take advantage of the attractive returns available from financing deals, after traditional metal trading profits disappointed over the past year. 

Shutdowns of costly production capacity and operational problems at other facilities – such as Oman’s Sohar Aluminium, which declared force majeure on Thursday July 19 – have increased the tightness and piled further pressure on the premiums. 

TRANSCRIPT: The aluminium market is in an unusual position. The huge amounts of metal in warehouses and historically low prices would normally suggest a buyers’ market, but the premiums over the London Metal Exchange price, that are ostensibly to cover the cost of accessing material in various geographic locations, are at record highs, indicating a severe tightness of supply.

In fact, the low prices are a function of the waves of investment money that have come into haven commodities following the financial crisis, and now take their lead from currencies and macroeconomic trends. On the other hand the high premiums are a function of the majority of warehouse stocks being tied up in long-term financing deals, which are among the most visible effects of the influx of new money, and have led to the lack of physical availability of metal.

Aluminium started 2012 at $2,035 per tonne, and the European premium stood then at just over $105 per tonne. Prices rose through January and February as the euro strengthened after Greece agreed to large budget, spending and state employment cuts, but sentiment soured on the realisation that the eurozone’s economic problems were not solved. Prices fell $200 in March, near the same again over April and May and fell below the psychological $2,000 mark in early June to a low around $1,850 per tonne – well below the cost of production for most manufacturers. Already there have been a number of factory shutdowns.

But premiums have been rising all year. Tight physical supply has been made tighter by the recent shutdowns, and uncertainty over downstream sales means that physical buying is being done on a hand-to-mouth basis, resulting in occasional buying flurries that push premiums higher still. Premiums in Europe, the USA and Asia are all at record highs, and the consensus view is that they will go higher still.

So long as low interest rates give investors access to cheap money, and the LME contango persists, meaning that future prices remain above cash prices, the warehouse deals will increase and the market will remain tight. Premiums will go even higher. Traditional aluminium buyers are having to adapt to a market in which their demand is no longer the main driver of prices or premiums. As one aluminium producer told me last week, the situation is beyond the industry now. It has become a global, political thing.

Jethro Wookey
Twitter: @jethrowookey_mb