Are Physical Delivery Premiums Being Manipulated?

Metals buyers are an assiduous lot, carefully tracking and recording the price movement of those base metals on which the materials and components their firm depends with admirable diligence. Ask a metals buyer for the current copper price and he will often have the number to within a cent per pound off the top of his head.

But while our contracts for semi-finished or finished metals are often based on the LME or Comex metal quotation, an equally important component of the physical trading market is treated with only secondary importance — namely, the premium charged for physical delivery of prompt metal.

This is the premium the market has to pay for delivery of physical primary aluminum, copper, nickel and other base metals to a specified delivery point. For the purposes of contract compliance on a three-month resting order for aluminum sheet or copper strip, this premium does not generally matter (see the exception below), but for the purposes of judging the underlying state of physical demand for the metal, availability and future price direction, the premium is a crucial guide of actual availability.

A recent FT article reported on Glencore’s upbeat picture of the commodity markets following a robust quarter in spite of commodity price declines. The physical trading arm of the group has done very well from high spot delivery premiums it has been able to secure, in spite of lackluster LME base metals prices.

A Reuters article reported that aluminum US Midwest spot premiums had reached 10 cents per pound as banks, traders and their warehousing companies have locked up primary aluminum, mostly in Detroit. A significant part of the 1.4 million tons in Detroit (about a third of LME stocks) is awaiting delivery of up to 10 months in spite of strong physical demand.

This US Midwest premium will feed through directly into higher contract prices for semi-finished and finished metals consumers wherever they have purchase deals priced at a premium over the benchmark quotation. If metal flowed out of LME warehouses freely, the premium would not be so high as physical demand could be met by physical delivery, but while the stranglehold prevails, everyone pays the price in spite of the market being in oversupply on an industry production and consumption measure.

Mills are selling directly to major investors like traders and banks, partly for convenience in moving large tonnages and partly because the system of removing physical metal from available supply suits them, it keeps the market tight and supports prices.

Continued in Part Two.


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