* 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 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
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."