Investors plunge back into aluminium finance deals, premiums rise

Industry News 10:33:05AM Oct 29, 2013 Source:SMM

Mon, 28 Oct 17:28:00 GMT

* Duty-paid premiums rise to $245/265 a tonne in Rotterdam
* Queues to obtain metal from Vlissingen, Detroit rise
* Alarm over LME plan to reduce warehouse backlogs subsides

By Maytaal Angel and Harpreet Bhal

LONDON, Oct 28 (Reuters) - Investors are again locking up aluminium in warehouses as collateral for financing deals, driving up premiums consumers must pay to to obtain metal quickly, months after the London Metal Exchange proposed plans to free up backlogged metal.

This month the premiums, the amount paid above LME prices to withdraw physical aluminium from the storage network overseen by the exchange, have climbed nearly 5 percent.

The LME, which in July put forward ideas for consultation, said on Friday it had made a decision "in principle" on reforming its global warehouse system, which is blamed for inflating metal costs and has drawn scrutiny from U.S. and European regulators. [ID:nL5N0IF344].

The LME, the world's biggest marketplace for industrial metals, has yet to release details of Friday's decision.

Pressure for it to shorten the queues to withdraw metals is high - some aluminium consumers have filed private lawsuits in the United States over the issue. [ID:nL6N0GA3G0]

At the same time the latest rises in aluminium premiums highlight the limits on the exchange's power to cool a market where investors are hungry to lock up metal.

"Stocks are effectively still being used for financing deals and this is regardless of any proposed or real change of rules from the LME’s side," said a Europe-based physical aluminium trader.

"The LME board can’t control what is going on with financing deals. These stocks are being put off exchange and I don’t see this easing any time soon, as there is money to be made on this play."

Financing deals involve an investor borrowing money at low rates to buy physical aluminium, striking a warehouse deal to store it cheaply and immediately selling it forward at a profit using LME futures .

Experts believe most of the estimated 10 million-15 million tonnes of global aluminium stocks are locked up in such deals.

Duty-paid aluminium premiums in Rotterdam have recovered in October to trade at around $245-265 a tonne from a low of some $235-255 a tonne seen in August and September, traders said.


QUEUES BUILD

Another factor lifting premiums is that LME warehouse owners increase revenues by concentrating metal in individual locations, where consumers can face queues of up to a year and a half to get hold of it and the aluminium incurs rental charges during the wait.

The LME in July proposed new rules to overhaul the delivery system from next April that would force warehouses to release more stocks than they take in once the queue exceeds 100 days.[ID:nL1N0FL088]

Though the announcement initially worked to reduce warehouse backlogs and knock down aluminium premiums by some 20 percent, investors started bidding the metal back up in October. [ID:nL5N0H61AQ]

LME data shows the wait to withdraw metal at Vlissingen in the Netherlands and Detroit in the United States, has shot back up to nearly 15-1/2 months and 16 months respectively in October, down from just over 14 months and 13 months respectively in September.

"The market got to grips with what the LME was saying and now we've seen there's not much metal coming out. With interest rates low you can put your metal in financing deals rather than sell it," said another Europe-based aluminium trader.

Wood Mackenzie analyst Kamil Wlazly said that even if the LME implements the new proposals, the fundamental effect on the market will be minimal.

"We expect that it would take around 2-1/2 years for warehouses in Detroit and Vlissingen to get down to 100 days," he said, adding that the stock release necessary to bring the queues to 100 days would be approximately 0.5 million tonnes in the two major locations during this time.

"Considering that Europe and North America are net importers of aluminium and have quite considerable consumption in absolute terms, this would be a drop in the ocean."

Nevertheless, some struggling aluminium producers who rely on firm premiums to turn a profit, fear that drastic changes to LME load-out rates could result in a flood of stocks onto the market and depress premiums too far.

Russia's United Company Rusal <0486.HK> and U.S. group Alcoa Inc , the world's two biggest aluminium producers, have publicly lobbied for the LME to leave its warehousing rules unchanged. [ID:nL6N0HY3G1] [ID:nL5N0IB14N]


(Editing by Veronica Brown and Anthony Barker)

((maytaal.angel@thomsonreuters.com)(00442075429105))

 

Key Words:  ALUMINIUM/PREMIUMS  

Investors plunge back into aluminium finance deals, premiums rise

Industry News 10:33:05AM Oct 29, 2013 Source:SMM

Mon, 28 Oct 17:28:00 GMT

* Duty-paid premiums rise to $245/265 a tonne in Rotterdam
* Queues to obtain metal from Vlissingen, Detroit rise
* Alarm over LME plan to reduce warehouse backlogs subsides

By Maytaal Angel and Harpreet Bhal

LONDON, Oct 28 (Reuters) - Investors are again locking up aluminium in warehouses as collateral for financing deals, driving up premiums consumers must pay to to obtain metal quickly, months after the London Metal Exchange proposed plans to free up backlogged metal.

This month the premiums, the amount paid above LME prices to withdraw physical aluminium from the storage network overseen by the exchange, have climbed nearly 5 percent.

The LME, which in July put forward ideas for consultation, said on Friday it had made a decision "in principle" on reforming its global warehouse system, which is blamed for inflating metal costs and has drawn scrutiny from U.S. and European regulators. [ID:nL5N0IF344].

The LME, the world's biggest marketplace for industrial metals, has yet to release details of Friday's decision.

Pressure for it to shorten the queues to withdraw metals is high - some aluminium consumers have filed private lawsuits in the United States over the issue. [ID:nL6N0GA3G0]

At the same time the latest rises in aluminium premiums highlight the limits on the exchange's power to cool a market where investors are hungry to lock up metal.

"Stocks are effectively still being used for financing deals and this is regardless of any proposed or real change of rules from the LME’s side," said a Europe-based physical aluminium trader.

"The LME board can’t control what is going on with financing deals. These stocks are being put off exchange and I don’t see this easing any time soon, as there is money to be made on this play."

Financing deals involve an investor borrowing money at low rates to buy physical aluminium, striking a warehouse deal to store it cheaply and immediately selling it forward at a profit using LME futures .

Experts believe most of the estimated 10 million-15 million tonnes of global aluminium stocks are locked up in such deals.

Duty-paid aluminium premiums in Rotterdam have recovered in October to trade at around $245-265 a tonne from a low of some $235-255 a tonne seen in August and September, traders said.


QUEUES BUILD

Another factor lifting premiums is that LME warehouse owners increase revenues by concentrating metal in individual locations, where consumers can face queues of up to a year and a half to get hold of it and the aluminium incurs rental charges during the wait.

The LME in July proposed new rules to overhaul the delivery system from next April that would force warehouses to release more stocks than they take in once the queue exceeds 100 days.[ID:nL1N0FL088]

Though the announcement initially worked to reduce warehouse backlogs and knock down aluminium premiums by some 20 percent, investors started bidding the metal back up in October. [ID:nL5N0H61AQ]

LME data shows the wait to withdraw metal at Vlissingen in the Netherlands and Detroit in the United States, has shot back up to nearly 15-1/2 months and 16 months respectively in October, down from just over 14 months and 13 months respectively in September.

"The market got to grips with what the LME was saying and now we've seen there's not much metal coming out. With interest rates low you can put your metal in financing deals rather than sell it," said another Europe-based aluminium trader.

Wood Mackenzie analyst Kamil Wlazly said that even if the LME implements the new proposals, the fundamental effect on the market will be minimal.

"We expect that it would take around 2-1/2 years for warehouses in Detroit and Vlissingen to get down to 100 days," he said, adding that the stock release necessary to bring the queues to 100 days would be approximately 0.5 million tonnes in the two major locations during this time.

"Considering that Europe and North America are net importers of aluminium and have quite considerable consumption in absolute terms, this would be a drop in the ocean."

Nevertheless, some struggling aluminium producers who rely on firm premiums to turn a profit, fear that drastic changes to LME load-out rates could result in a flood of stocks onto the market and depress premiums too far.

Russia's United Company Rusal <0486.HK> and U.S. group Alcoa Inc , the world's two biggest aluminium producers, have publicly lobbied for the LME to leave its warehousing rules unchanged. [ID:nL6N0HY3G1] [ID:nL5N0IB14N]


(Editing by Veronica Brown and Anthony Barker)

((maytaal.angel@thomsonreuters.com)(00442075429105))

 

Key Words:  ALUMINIUM/PREMIUMS