CHICAGO Regional aluminum premiums should gradually decrease to levels last seen 18 to 24 months agoor even four to five years agodue to the new London Metal Exchange warehouse policies, Novelis Inc. chairman and chief executive officer Philip Martens said.
"Over time, I think you will see a moderation of regional premiums. ... But it wont happen overnight," Novelis said Nov. 11 in an exclusive interview with AMM.
The Atlanta-based aluminum roller and recycler generally passes through regional premiums in North America and Europe and should be unaffected by moves either way in those markets, Martens said. The main impact likely will be felt in Asia, where Novelis is exposed to Japanese premiums, which have increased sharply, while its competitors in China do not face the same cost increases, he said.
Japanese premiums were in a range of $70 to $80 per tonne in mid-2012 before spiking to $240 to $250 more recently, Martens said. "I think it will slowly unwind itself. It just takes time."
Midwest premiums have already edged down and Japanese premiums likely will follow, just as in the past Midwest tags rose before those in Japan, Martens said during an earnings conference call. But he conceded that the company likely would face "real pricing challenges" in Asia for the next 12 to 24 months.
In the meantime, Novelis is "very pleased" with the LMEs changes aimed at reducing wait times for metal at congested exchange-listed warehouses and boosting transparency, Martens told AMM. The moves were necessary, given an aluminum market that he characterized as "abnormal" and in need of reforms to re-establish a "better balance."
"Anytime youre in a situation where its clear that its financial engineering and there is no value-add to the products that get produced from whatever commodity is involved, that stuff always has a limited shelf life," Martens said. "Youve just got to be patient with it because none of that stands the test of timeit never has and it never will."
New York-based JPMorgan Chase & Co. has already decided to step away from its physical commodities business (amm.com, July 26) and others have started to do so as well, Martens said. "Banks and financial institutions ultimately will reallocate their capital to different investment strategies."
Wide contangos have made financing deals attractive to investors, given low interest rates (amm.com, Oct. 24), but banks and the LME also have faced sharp criticism over warehousing policies from end-users, producers and politicians (amm.com, July 23).
The LME has cut the limit on the length of queues it will permit at individual warehouse locations to 50 days, down from a 100-day limit it proposed in July (amm.com, Nov. 7).