* Fewer fixed term supply deals to be concluded
* Consumers bet warehouse overhaul will knock premiums
By Emma Farge
GENEVA, Sept 18 The world's top aluminium
producers and consumers are at loggerheads over the thorny issue
of what price, or premium, should be paid to secure metal
deliveries, and will conclude fewer fixed term supply deals this
year, industry sources said.
Producers Rusal , Alcoa and Rio
Tinto are descending on Geneva for an industry
gathering that marks the start of annual supply negotiations
with aluminium product makers.
But unlike in recent years, top consumers like Novelis
and Rexam have a strong hand to play thanks to
U.S. regulatory scrutiny into claims big banks and trade houses
artificially inflated aluminium premiums by building backlogs at
London Metal Exchange (LME) warehouses.
The scrutiny comes alongside a proposed overhaul of
warehouse practices on the LME, which has already helped knock
European spot premiums down some 20 percent off a June record
high near $300 a tonne.
"I'm sure term premiums will be lower than $230-250 a
tonne," said a source who represents consumers.
"Producers are getting nervous about the implementation of
LME warehouse rules (and) I think most consumers are going to
continue to live hand to mouth because they think the premiums
are going to come down further."
In a bid to tackle year-long aluminium warehouse backlogs
blamed for inflating premiums, the LME has proposed that as of
next April, warehouse companies with wait times of over 100 days
must load out more metal than they take in.
The proposal will be voted on this October, but industry
players expect it to be approved given all the U.S. regulatory
scrutiny, and given the LME is itself a co-defendant in private
U.S. lawsuits brought on by consumers.
"If anything, the risk is that the (LME rule) change may be
more substantive, and there's no doubt it will have a bearing on
premiums - who would want to commit with all this uncertainty
hanging over the market," said Macquarie analyst Duncan Hobbs.
Premiums are paid over the LME cash price to cover
physical delivery costs, but they also reflect changes in
supply-demand dynamics, like increased metal availability as a
result of reduced backlogs at LME warehouses.
Spot premiums for duty-paid aluminium in Rotterdam were
quoted at $235-255 a tonne in September, falling from a record
of $275-295 in late June.
In contrast to easing premiums in Europe, top aluminium
producers have offered Japanese buyers a premium of $250 a tonne
for October-December primary metal shipments, unchanged from the
Even if the final term premium is settled slightly below
$250 a tonne, as expected, the offer could still help support
producers' arguments for premiums to remain elevated in Europe,
but they will have a hard time convincing consumers to lock-in
long-term deals on higher prices.
Industry sources said consumers who sign long term supply
deals were likely to want flexible terms on premiums this year,
such as a floating premium linked to an index.
Last year, when premiums were at record highs, the world's
largest aluminium producer Rusal, said it expected to see
floating premiums contracts where producers are able to fix the
margin over costs.
"The irony is that it was producers pushing for floating
prices last year because they knew that prices would go higher.
Now it's exactly the opposite situation and consumers are
pushing for them," a Europe-based trader said.
"It won't be easy for the producers to persuade them to
change their minds."