* Deutsche Bank sees regular trade through its platform
* Consumers resist paying extra, aluminium in surplus
* Premiums lifted by financing deals, warehouse logjams
By Veronica Brown and Susan Thomas
LONDON, Feb 7 Banks in Europe have begun trading
swaps designed to protect industrial users of aluminium - who
already have to pay steep premiums above the London Metal
Exchange (LME) cash price to get hold of metal - from yet bigger
Banking and industry sources say customer enquiries on using
the new derivatives products are gaining traction.
But volumes are limited because many potential clients think
it is unjust and could become unnecessary to pay extra for
derivatives to hedge against rising premiums at a time when
there is a global glut of aluminium.
"It's an active market (in the U.S. and Europe), we have
regular trades going through the platform," Robert Abel,
director, EMEA metals sales and origination at Deutsche Bank
in London, told Reuters.
"It's a small market and slightly illiquid in the sense that
people are still joining the market, but it's certainly building
up," he added.
JP Morgan and Credit Suisse are also said
by traders and industry sources to be providing products to
hedge aluminium premiums. Both banks declined to comment on how
much business they had been doing in the area.
A chief reason aluminium can be costly for firms needing to
make car parts or kitchen utensils is that stockpiles are tied
up by banks, who can profit from metal financing deals now that
interest rates are low.
So even though there are around 5 million tonnes piled up in
the global network of warehouses registered by the LME, the
world's biggest marketplace for industrial metals, buyers must
bid up premiums to obtain material that is not bound up in
HIGHER AND HIGHER
Premiums for duty-paid aluminium in Rotterdam are currently
at record highs of around $300 a tonne over the cash price
, which was around $2,065 a tonne this week.
Benchmark U.S. Midwest spot aluminium premiums
have also reached a record high.
Premiums have been rising since the financial crisis pushed
interest rates to near zero, making it attractive for banks to
simultaneously buy aluminium and sell it forward for a profit,
using cheap funding to store it inexpensively in the interim.
A steadily improving global economy, which may bring rising
interest rates and reduce the appeal of such financing deals,
has caused some in the market to question the need and
sustainability of products aimed at hedging premiums.
These critics say the new swaps have been launched too late.
"My experience is often the banks become active and promote
these tools, at a time when it's probably less likely to be
interesting to the clients," said Nick Madden, vice president
and chief procurement officer at Novelis, a unit of Hindalco
"It's like taking out flood insurance after the flood."
While data from most leading economies has been positive,
some argue low interest rates, which justify hedging against
rising premiums, remain firmly intact.
"There has been some understandable reluctance from
aluminium consumers in Europe to fixing forward metal premia in
swap form, given that premia are at or near all-time highs,"
said Kamal Naqvi, Head of EMEA Commodity Sales at Credit Suisse.
"However, the argument for fixing these premia via swaps is
that the conditions that produced them appear likely to continue
and could push levels higher still, so some level of risk
management does make sense, particularly for the largest
consumers of the metal."
Many buyers in North America already hedge their costs using
over-the-counter (OTC) derivatives based on an average monthly
Midwest premium, which is paid on top of the LME's benchmark
The CME Group launched a cleared Midwest aluminum
premium swap in April last year. No trades have taken place yet,
exchange data shows.
Another factor supporting premiums is the regulations of the
LME, which permit companies running the warehouses it registers
to release only a fraction of their inventories each day and
collect rent on the metal that is waiting to be delivered out.
In theory clients who buy metal via the LME, a futures
market recently acquired by the Hong Kong stock exchange
, can collect it at the most convenient warehouse
In practice they can be kept waiting for months,
contributing to tightness of supply of metal and forcing some of
them to offer premiums for urgently needed supply.
Even if the swaps prove to offer some relief, metals
consumers say the underlying problem remains.
"The whole issue is ultimately should premiums be that high
anyway?," an industry source said.
"So many consumers are still going to be asking why the hell
are premiums this high when the European Union is in recession.
It doesn't make any sense."