LME Rule Changes: Is This Finally the End of High Physical Premiums?

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So the LME has made its announcement. Among a number of changes, particularly crucial is the board’s decision to set a cap of 50 days of load out queues –any longer than that and face a limiting ratio on how much they can take in relative to the load out, currently to be set at 0.5 or load out twice load in.

With a few destinations facing aluminum queues of a year or more, clearly this is going to take a long while to work through. It won’t come into effect before April of next year, so when will the desired result be achieved? That is, a lowering of the high physical premiums on aluminum?

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These premiums not only hurt consumers, but also undermine the LME’s claim to offer true global price discovery and – let’s face it – they are keeping some smelters in the black.

When the proposals were first mooted back in July, the market reacted with gradually falling physical premiums over the summer. It seemed as if a reduction in load rates would have the desired effect. But over recent weeks, premiums have begun to creep back up again, almost as if the market is ignoring the loss of revenue that will be available to warehouse companies to bid for metal.

Make no mistake, at least a part of these premiums came about because warehouses in certain locations could offer incentives for metal to be delivered into their premises rather than consumed or stored elsewhere. Those incentives were paid for out of the revenue derived from a long load out queue.

According to Jack Farchy of the Financial Times, 100 days would give the aluminum warehouse about $120-130 of additional rent while the metal was waiting for load out.

How does it continue to break down? Continued in Part Two.

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