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
P1020 premiums fell to a range of 11.75 to 12 cents per pound
from 12 to 12.25 cents previously.
"Its 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.
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
negativeits 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
LMEs 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
materialsome 1.8 million tonnesis in U.S.
warehouses, including 1.4 million tonnes in Detroit, second
only to Vlissingen, the Netherlands.
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
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
premiumI dont 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
its 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
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 its
definitely a step in the right direction," the consumer source
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.