(The opinions expressed are those of the author, a columnist
By Andy Home
LONDON, June 5 Another quarter and another
record premium level for Japanese aluminium buyers.
The premium over the London Metal Exchange cash price for
third-quarter shipments to Asia's largest importer seems to be
settling around the $400 per tonne level, up from $365-370 in
the current quarter.
A year ago the premium PREM-ALUM-JP was just $250 and
until the third quarter of 2012, it had never been higher than
Japanese buyers, however, have little choice but to take the
Although still viewed as a benchmark for the whole of Asia,
the Japanese quarterly premium no longer has anything to do with
regional supply-demand nuances. It is now just one manifestation
of a global premium structure.
If Japanese buyers baulk, producers can simply point to
premiums in North America and Europe with the implicit threat of
diverting shipments to those markets.
More alarmingly for buyers everywhere, there may be further
premium pain to come.
Graphic on global aluminium premiums:
THE UNSTOPPABLE PREMIUM MACHINE
That, certainly, is the stark warning from Oleg
Mukhamedshin, Deputy Chief Executive of Russian aluminium giant
Rusal, speaking to reporters earlier this week.
"We think the premium can easily reach a new record high
well above $500," he said, adding for extra emphasis: "In the
third quarter we can see new records, even $600 would not be out
of the question."
What once would have seemed a flight of producer fantasy
doesn't seem quite so far-fetched these days. Those who have
tried to stand in the way of rising physical premiums have been
steam-rollered - witness the short-covering frenzy that sent
U.S. Midwest premiums into supernova at the start of this year.
The U.S. Midwest premium, as assessed by Platts, a leading
global energy, metals and petrochemicals information provider,
surged to an all-time high of 20.75 cents per lb ($457.45 per
tonne) in early January. The pull-back made it only as far as
18.25 cents in early April and now the premium's rising again,
hitting 19 cents at the end of May.
The same is happening in Europe and the unstoppable premium
machine has just struck Japan.
So just how high might premiums go? To answer that question
would mean disentangling the various interconnected drivers.
That is itself a major problem since there is no clear-cut
consensus as to which of them holds the key to unlocking the
premium riddle, a dilemma that was laid bare in the aluminium
industry's fractured response to the LME's consultation on its
Is it the load-out queues at LME locations such as Detroit
and Vlissingen? Is it the in-vogue stocks-financing trade that
has tied up so much surplus metal and kept it away from
manufacturing users? Or is it the multiplying smelter closures
that are pushing the market into deficit?
All are somehow in the mix and right now there's still no
easy way of saying which is the most important.
ALL ABOUT QUEUES?
Take those infamous load-out queues, for example.
The LME's proposed solution to its queue problem has already
altered warehouse company behaviour even though its
load-in-load-out formula is stuck in legal limbo thanks to the
courtroom fisticuffs between the exchange and Rusal.
The revolving door strategy employed by Metro in Detroit,
whereby rental from the load-out queue financed incentives to
attract more metal into its sheds, has been stopped. Not one
tonne of aluminium has been warranted in Motown in the last two
The load-out queue, however, has still been growing because
metal is still being cancelled and joining the queue, 180,000
tonnes of it over the course of April and May.
As of the end of April, the aluminium queue at Detroit stood
at 683 days. The cost of getting metal out, a combination of the
daily rental and the load-out charge, was $388 per tonne, within
a whisker of Platts' then Midwest premium assessment of $406.
Until the queue actually starts shortening, the apparent
linkage between the two remains intact. On current trends, the
day is fast approaching since there are now only 158,525 tonnes
of non-cancelled aluminium in the city.
But then there is Vlissingen, the Dutch port dominated by
Pacorini, the warehousing arm of Glencore. Although
inflows have slowed, they have by no means stopped and it looks
like movement is being carefully calibrated to minimise queue
decay in the event the LME's new policy makes it through the
The aluminium queue here was 748 days at the end of April
and the notional "value" was $406 per tonne. For those, and they
are many, who argue that physical premiums are all about queues,
there's nothing here to prove them wrong yet, although things
will get a lot more interesting when the Detroit queue starts
FUNDS AND FUNDAMENTALS
But it should be clear by now that queues are not the only
driver of premiums. After all, if less metal is flowing into the
LME warehouse system and more leaving, why hasn't there been an
impact on physical market availability and therefore premiums?
The answer comes in two parts.
Firstly, hardly any of that metal leaving Detroit and
Vlissingen every day is going anywhere near an actual
manufacturer. Rather, it is still mainly, and quite possibly
totally, going to cheaper off-market storage to earn a tidy
profit for stocks financiers.
The trade remains in robust good health. True, there has
been a sharp contraction in the front part of the LME forward
curve over the last couple of days, the benchmark
cash-to-three-month period CMAL0-3 closing Wednesday valued at
$22.25 contango, compared with over $40 a week ago. But we've
seen these spread spasms come and go over recent years with
little impact on the bigger financing picture.
And although the prospect of higher interest rates is
looming larger in the United States and the UK, the European
Central Bank has just moved in the opposite direction with a
further loosening of monetary policy. As long as
money remains cheap and interest rates low, one of the pillars
of stocks-financing profitability remains firmly in place.
Then, of course, there is the fact that there is less metal
around to plug the supply gap left by the financiers. As more
and more smelter capacity is mothballed, this fundamental driver
of higher premiums is assuming ever greater significance.
North American production was running at an annualised rate
of 4.6 million tonnes in April, according to the latest figures
from the International Aluminium Institute. That's the lowest
level since August 2010.
Smelter capacity has been permanently lost in both western
and eastern Europe over the last couple of years with many
plants in the former still struggling to survive.
No-one sniggers any more when producers talk about a deficit
market. What was once viewed as wishful thinking is rapidly
HIGHER AND HIGHER?
To some extent it doesn't matter which of these drivers you
think is the more important, since all three are still
individually pushing premiums in the same direction.
For now at least.
At some stage it does look as if that Detroit queue is going
to start contracting. And spread tightness could yet free up
some of the aluminium locked up in financing deals, although the
ironic net result may be to attract more metal into the LME
system, where it can be snapped up again and placed back in
With so many moving parts, the aluminium premium machine may
yet come unhinged but not in time to bail out Japanese buyers
for their next quarter shipments.
And as for Rusal's claim that premiums could go higher still
to $500 or "even $600" over the next few months? It still seems
improbable. But it's by no means impossible.
(Editing by David Evans)