Warehouse wars snarl aluminium supply contract talks
* Rusal says to shift to floating premiums
* Consumers prefer to buy hand-to-mouth
* Aluminium premiums in Europe rise to fresh high
By Harpreet Bhal and Melissa Akin
MOSCOW/LONDON, Sept 14 (Reuters) - A battle between warehouses for aluminium that has propelled costs to secure metal to record highs, despite a glut, is raising tensions between producers and consumers in annual supply contract negotiations that started this week.
Spot market premiums have soared as vast amounts of aluminium are stuck in warehouses owned by big banks and trading houses, with millions of tonnes locked away in financing deals and millions more clogging up a system that causes months-long delays to get metal out.
So while aluminium is in chronic oversupply, it is not readily available, and this has pushed premiums higher.
In an unprecedented move, Russia's RUSAL, the world's largest producer of primary aluminium, has suggested it could offer floating premiums in the term supply contracts it negotiates with consumers for 2013, with both sides reluctant to set long-term deals as spot market premiums reach record highs.
The usual practice of agreeing on a fixed premium - money paid over the benchmark London Metal Exchange (LME) cash price to secure physical metal - forms a part of annual contract negotiations between producers and consumers.
A possible decision by RUSAL to offer floating premiums would hold sway in determining other deals in Europe.
"Consumers don't want to lock in high premiums and will be interested in shortening the term of the contracts," said Edgardo Gelsomino, senior aluminium analyst at Wood MacKenzie.
"The warehouse scrum for metal has led to higher premiums and this is the reason for the markets wanting to move to short-term or floating premiums."
While LME prices languish around three-year lows, aluminium buyers are paying record premiums for physical delivery on top of the base price.
This is because warehouses owned by JPMorgan and Goldman Sachs offer financial incentives and financing deals to store metal in their facilities -- forcing end-users to bid up prices to secure the metal for their own needs.
Almost 5 million tonnes of aluminium has been pulled into LME-bonded warehouses over the past five years, much of it locked in for years at a time.
The market is expected to remain in surplus for at least another year, the contango underlying financing deals will remain in place and support premiums.
Spot premiums are likely to continue to rise over the next year and a half, RUSAL First Deputy Chief Operating Officer Vladislav Soloviev said.
"There are different scenarios of market development, including a decline, but we do not expect this during the next 18 months. Premiums will continue to rise," he told a Metal Bulletin aluminium conference in Moscow.
A physical trader said very few long-term contracts were being concluded because buyers were unhappy with the current levels and buying hand-to-mouth.
"They don't want to commit at current levels," he said. "And some sellers don't want to commit for more than three months either. So even if consumers did want to book all their annual consumption at these levels they may find themselves with nobody to trade with."
Aluminium premiums in Europe have been on a steady uptrend since the beginning of the year. Duty-paid physical aluminium in Rotterdam was quoted at a fresh record high of $270-290, rising from $260-280 at the end of August.
Duty unpaid was quoted at $210-230, against $210-220 previously.
Three-month aluminium prices touched a three-year low at $1,827.25 a tonne in mid August, after falling more than 10 percent in the second quarter.
"The structural problems in the aluminium market are destroying it as a place for producers and consumers to use as a hedging tool where you have consumers who simply can't hedge their needs using aluminium prices because they can't hedge the physical premium," Natixis analyst Nic Brown said.
And producers had been linking long-term supply deals to aluminium prices on the LME without factoring in the physical premium, he added.
"Both of them are affected negatively. It's turning into a market dominated by financing deals. The warehousing companies, the trading intermediaries that are getting rich at the expense of both producers and consumers."