On Aluminum Premiums and LME, Alcoa Inc. May Have It Right

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We’ve been mulling the London Metal Exchange’s recent announcement on aluminum warehouse load-out rates (make sure to read Part One here) and we continue below.

In theory, by placing a 50-day cap at current rents and delivery charges, the aluminum warehouse would only earn $60-65 for each additional ton of metal delivered in.

Yet aluminum spot premiums are at $190-220/ton, suggesting more is at play than just the warehouse load out queues.

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The other major play is the financiers, buying spot and selling forward at a profit on a strong forward curve.

The stronger the forward curve (and it has strengthened in recent weeks), the lower the rent, and the cheaper the financing, the more the financier has to play with to bid for metal.

It would seem the stock and sale financial model is alive and well and keeping physical premiums up; how long it will last is anyone’s guess, but the market doesn’t seemed perturbed by the LME’s rule change. Does that mean the rule change is a waste of effort?

No, as Jack Farchy points out, the long queues had become self-reinforcing with the largest warehouses and the biggest queues able to offer the highest premiums, adding yet more metal and creating yet more of a queue – it couldn’t be allowed to go on and action is long overdue.

Is this the end of the markets pricing issues? No, but the queues were only part of the problem – how the market corrects the high physical premiums is another matter.

Indeed, Alcoa may be right in that making a market to hedge and fix MW Ingot premiums (and FOB Rotterdam premiums and CIF main Japanese port premiums) rather than try to shrink them may be the answer.

The true price of aluminum is “LME price + regional physical Ingot premium,” and the sooner we all work to that model, the better.

INFOGRAPHIC: Don’t miss our in-depth analysis of the LME warehousing situation.

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