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.
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.