September 17, 2013 / 11:04 PM / in 4 years

Aluminium industry at odds over supply deals, warehouse reforms

* Fewer fixed term supply deals to be concluded

* Consumers bet warehouse overhaul will knock premiums

By Emma Farge

GENEVA, Sept 18 (Reuters) - 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 previous quarter.

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.”

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