Higher Physical Metal Premiums Profit No One

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Continued from Part One

In contrast, consumers of tin (arguably a market much more in balance than oversupplied aluminum) are not facing high spot delivery premiums because mills are keeping the market well-supplied with direct deliveries, said to be at premiums for high-grade tin over the LME cash price of $625 to $650 a ton, and for standard-grade tin at $400 to $450 a ton. This in spite of 87 percent of the LME’s tin sitting in Malaysia’s Johor and delivery delays potentially stretching to 6-8 weeks in Europe, according to Reuters.

Well-supplied nickel is likewise trading at modest premiums with cut and full plate material in Rotterdam at $250-275 per ton and $20-100 a ton respectively, and the LME moved recently to increase the minimum load-out rates for tin and nickel to ensure the market remained well-supplied and these lower volume metals were not locked behind the wall of aluminum clogging up Vlissingen and Rotterdam warehouses.

Indeed, a Reuters article carries some pretty hard-hitting comments by respected analysts such as Robin Bhar at Societe Generale about the activities of major banks and traders in influencing these premiums for physical delivery of prompt metal; commenting mainly on the LME-set limits that operators like Glencore, Trafigura, Noble, Goldman Sachs, JP Morgan and even Barclays are required to meet as to how much of the market for a particular metal they can control.

The LME terms this a market-dominant position and operators are limited to holding no more than 50 percent of stock positions for fear they could manipulate the market price. However, what appears to have been happening is operators are content not to influence the underlying price but rather the premium paid for prompt delivery.

By Glencore’s own admission, even as the 3-month prices have decreased, the firm has made robust profits on the back of strong spot premiums – spot premiums that come from restricting physical supply of metal to the market. Back to Mr. Bhar and his comment:  “Increasingly operators are a lot more sophisticated in how they keep on the right side (of market abuse regulations),” he said, suggesting he thinks they are practicing market abuse, but being smart about not being caught for it.

So in some markets like the US aluminum market, increased physical premiums are directly feeding through into increased prices for consumers of virtually all downstream semi-finished and finished metals, but in others the effect is more subtle, with immediate consumers of prompt base metals incurring cost increases by way of increased premiums and then having to pass these on down the supply chain to consumers of semi and finished components.

Be assured of one thing though: increased physical premiums profit no one, apart from the trader or bank holding the position; and although base metal prices remained subdued, consumers could still see cost increases from rising physical premiums.

Comment (1)

  1. Josh says:

    “Be assured of one thing though: increased physical premiums profit no one, apart from the trader or bank holding the position…”

    Perhaps primary smelters/producers also benefit, as they are quoting against the midwest transaction price not LME.

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