Aluminium premiums are at all-time highs in the US, with Europe and Asia following suit. Despite the global increase in metal production, resources are being fed into financial trade, not the market.
Western smelters are being forced to shut or at least reduce capacity as traders continue to stockpile spare metal as collateral. Analysts have estimated that 10-15 million tonnes of aluminium stocks are currently tied up in financing deals.
This entails investors borrowing money at low interest rates in order to purchase resources, while paying warehouses to store the metals cheaply. This model exploits future price structures currently in existence, allowing investors to sell metals such as aluminium immediately for profit.
For metal producers, low aluminium prices in conjunction with high energy rates continue to force Western producers, such as US Ormet Corp into closure. INTL FCStone analyst, Ed Meir, posited that the reason we keep hearing that “metal is quite tight” is related to Ormet’s closure.
Meanwhile Dutch smelter, Aluminium Delfzijl BV (Aldel), also filed for bankruptcy on 30 December 2013. Aldel attributes its losses to the disparity between metal prices and electricity rates. Previously, the company’s production capacity was 170,000 tonnes annually.
These problems are not particular to the US. The Harbor Intelligence research institute believes that Europe, Asia, Mexico and Brazil will follow in the US’ footsteps
As the world’s largest metals marketplace, the London Metal Exchange has demonstrated inadequacy in dealing with these problems. In November 2013, LME announced significant alterations to its metal storage systems. In years prior to this, the exchange had been receiving complaints about long wait times and large premiums. Currently, the LME prices the delivery of metal in a three month period at approximately $1,775/tonne.
Analysts and manufacturers hoped that the LME’s plans to cut waiting time to a maximum of 50 days along with other measures would lower premiums. Instead, premiums continue to increase. Platts US Midwest aluminium premium went from $0.03 to $0.15 for each pound of metal, reported the pricing agency.
Meir told Reuters that “the fact that we are still trading at 15 cents today suggests that this was not a fluke and that we will likely stay at elevated levels for some time across all geographies.”
In a note to clients, Standard Bank analyst Leon Westgate wrote that, “it’s not clear if the premium spike is sustainable,” but that, “it does appear to reflect concerns amongst traders in terms of being able to replace aluminium units in an environment that includes weaker US production, reduced Canadian imports and a lack of LME material flowing out to the wider market.”
These problems are not particular to the US. The Harbor Intelligence research institute believes that Europe, Asia, Mexico and Brazil will follow in the US’ footsteps, anticipating record-high aluminium premiums in these coming weeks. The institute bases this theory on the fact that existing metal producers in the US are nearly sold out for the remainder of this month.
Additionally, China continues to produce more and more metal, exacerbating the problem. By driving aluminium prices even lower, Western producers are put under even greater strain. As investors lock away aluminium and metal producers continue to suffer the effects of low prices due to increased production, the imminent descent of premiums seems unlikely.