CHICAGO More than 90 percent of the aluminum industry could fall into the red if aluminum prices and premiums decline due to proposed changes to London Metal Exchange warehousing rules, JPMorgan Chase & Co said in a research note.
A decline in realized aluminum prices to $1,950 per tonne would lead some 75 percent of the aluminum industry to lose money, with that share rising to 90 percent or more with a further decline to $1,800 per tonne, JPMorgan analyst Ben Defay said in an Aug. 30 note.
"The proposals have already had an impact, with warehouse incentive fees virtually disappearing in recent weeks," he said, noting that this is expected to put pressure on physical premiums as consumers renegotiate terms with producers in coming months.
LME warehouse companies will be required to deliver out more metal than they draw in at storage locations where long load-out queues have developed under new exchange proposals (amm.com, July 1).
Premiums have been supported by cash-and-carry trades and incentives paid by warehouses to attract metal, JPMorgan said. As a result, aluminum producers have realized higher prices than would normally be expected in a market that has been in surplus for the past five years, the New York-based bank said.
The change in LME rules could slice into aluminum prices in the medium term, although the trend should also "sow the seeds for much-needed supply discipline in the long term," JPMorgan said, cautioning that the adjustment period could be painful.
Premiums have risen to more than $250 per tonne from an average of $100 per tonne between 2000 and 2008, and now account for some 12 percent of realized aluminum prices vs. a 10-year average of only 6 percent, JPMorgan said. The rules changes could result in lower premiums and LME prices, the bank said. "The question is how quickly and how far prices will fall."
About 5.5 million tonnes of metal sits in LME warehouses, with another roughly 7 million tonnes in off-exchange sheds, JPMorgan said. "It seems reasonable to assume that at least some of this material makes its way out of the warehouse system," the bank said, noting that barring production cuts the aluminum market could remain in surplus until 2015.