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Aluminum premiums dip on LME rule shift

Keywords: Tags  Midwest premium, P1020, LME, warehouse, aluminum prices, incentives, Kamil Wlazly, Metal Bulletin Research aluminum


CHICAGO — Midwest aluminum premiums edged down slightly this week amid uncertainty about the impact of proposed London Metal Exchange rules aimed at trimming long lines at some registered warehouses.

AMM spot P1020 premiums fell to a range of 11.75 to 12 cents per pound from 12 to 12.25 cents previously.

"It’s a super slow week, so people are digesting the news out of the LME," one producer source said.

Under new exchange proposals, warehouse companies would be required to deliver out more metal than they draw in at storage locations with long load-out queues (amm.com, July 1).

One immediate effect of the proposed new rules was a lowering of incentives that warehouse companies had been paying in order to get material into store (amm.com, July 5).

Incentives to put metal in LME warehouses "most likely would go down" if the rules are implemented, the producer source predicted.

Warehouse incentives provide a floor to regional premiums, so the proposed LME load-out rates will keep premiums from rising, one trader said. If incentives start to fall as the rules are implemented, "then the floor goes down for premiums, so the impact is negative—it’s just a question of how negative and how quickly," he said, although he stressed that nothing was likely to change in the near term.

It could take some "critical mass" warehouses as much as 25 months to achieve the LME’s goal of reducing queues to 100 days, Metal Bulletin Research senior metals analyst Kamil Wlazly said in a recent research note. And even if adopted, the rules would not address aluminum stocked outside of LME warehouses, encouraging financiers to move business into off-warrant financing where they will "continue to compete with physical buyers for available aluminum units," he said

Global aluminum stocks in LME-registered warehouses totaled 5.4 million tonnes, according to July 9 data from the exchange. A third of that material—some 1.8 million tonnes—is in U.S. warehouses, including 1.4 million tonnes in Detroit, second only to Vlissingen, the Netherlands.

Still, primary aluminum producers have much at stake because they have offset low LME prices with record-high premiums that have "become the difference between profit and loss," Wlazly said.

The reduced delivery times and premiums the proposed rules could lead to "are likely to put further pressure on higher-cost smelters, encouraging supply-side adjustment," he said, estimating that about 4 million tonnes of production outside of China, much of it in North America and Western Europe, has been saved by higher premiums.

But market sources agreed that premiums, at least in the short term, remained relatively stable at historically high levels. "Scrap is still tight, so P1020 is not going to be given away," one market source said. "What (the proposed LME load-out/load-in rates) do is set a ceiling to the premium—I don’t think it will go any higher."

While some sources worried about potential disruptions from the new rules, others argued that the proposed changes were too little, too late. "If it’s the right thing to do, do it now," one consumer source said, arguing that the regulations would do little more than preserve the status quo of long waits for metal.

The new rules, should they be implemented, would not come into effect until April 2014.

Still, if congested LME warehouses are required to move metal out as quickly as they bring it in, then "they are less likely to incentivize producers to put material on the ground ... so it’s definitely a step in the right direction," the consumer source said.

While speculation about the LME rules abound, spot market activity was quiet because of summer vacations, market sources said. In addition, rebounding LME metal prices have discouraged activity as buyers wait to see whether higher tags are sustainable or poised for another tumble, they said.

The primary aluminum cash contract on the London Metal Exchange ended the official session July 11 at $1,800.50 per tonne (81.7 cents per pound), up 3.7 percent from $1,736.50 per tonne (78.8 cents per pound) at the beginning of the week but off 15.2 percent from a 2013 high of $2,123 per tonne (96.3 cents per pound) recorded Feb. 15.


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