Apparent aluminum deficit drives up spot prices against longer dates

LONDON (Reuters) - Shortages of aluminum for financing deals have significantly boosted prices of metal that can be bought for spot delivery or on physical markets against those for longer dated maturities such as three or six months ahead.

FILE PHOTO: Employees work at the production line of aluminium rolls at a factory in Zouping, Shandong province, China November 23, 2019. Picture taken November 23, 2019. REUTERS/Stringer

Given a large market surplus, which Macquarie’s Vivienne Lloyd estimates at 1.84 million tonnes this year, and aluminum inventories at 1.4 million tonnes in London Metal Exchange approved warehouses, the idea of shortages would seem to be contradictory.

But the issue is availability or a deficit of free-floating aluminum not tied up in deals where the warehouse firm shares the rent for storing metal with the company that put it into the warehouse on LME warrant -- a title document.

Traders say most of the free-floating aluminum is in Port Klang, Malaysia.

“Aluminium has been taken off LME warrant in Port Klang, but it isn’t going outside Malaysia,” an aluminum industry source said. “When aluminum moves in Port Klang, it’s for financing or rent deals, not for consumption.”

Graphic: Aluminium stocks in LME registered warehouses in Port Klang, Malaysia

The discount or contango for the LME’s cash against the three-month contract at $16 a tonne is down from above $40 a tonne in September.

That price differential for many traders no longer covers interest or storage costs for metal on LME warrant, making deals which involve buying aluminum now and selling for a future date at higher prices unprofitable.

Aluminium on LME warrant typically costs more than 50 cents a day a tonne to store, while rent for off-warrant metal mostly ranges between 5 and 15 cents a day, which could mean profitable financing deals.

Inventories of aluminum in LME warehouses in Port Klang at 814,225 tonnes are down about 20% since climbing above one million tonnes in July.

With cancelled warrants -- metal marked for delivery -- in Port Klang at 20%, more aluminum is due to leave LME warrant.

“The flows will reverse if things get so tight that we see backwardations (premiums) along the (maturity) curve,” a broking source said. “The market is expecting a large surplus this year, which will eventually be mopped up by financing deals.

Graphic: Price discounts for nearby aluminum vs longer maturities

Graphic: Aluminium stocks in LME warehouses

(This story corrects to say contango instead of backwardation in paragraph 6.)

Reporting by Pratima Desai; editing by David Evans