So what the heck is causing the surge in physical aluminum premiums? We laid out the details by the numbers here.
As we wrote very recently, strong demand and smelter closures have certainly played their part. But so do stock and finance deals, the favorite game of the big trading houses in the realm of Glencore Xstrata.
But First, Smelter Closures
Reuters details how significantly the US supply market has contracted over the last year, saying Alcoa has just announced the closure of another two potlines, with 84,000 tons of annual capacity at its Massena East smelter in New York state, in addition to the closure of a total of 200,000 tons of operating capacity in the United States since 2011.
This has comprised 124,000 tons at Massena and 76,000 tons at its Rockdale smelter in Texas.
Another 105,000 tons have been shut down at the Baie Comeau smelter over the border in Canada, where Rio Tinto has also closed its 100,000-tons-per-year Shawinigan smelter. Furthermore, Ormet has also just closed up shop, taking another 270,000 tons out of the market. North American production was running at an annualized 4.68 million tons in November, Reuters reports, the lowest run rate since September 2010, citing figures from the International Aluminium Institute (IAI).
What piqued our interest: how Glencore is involved in all of this.
Interestingly, the report goes on to say that while overall production has been contracting, its ownership has also been consolidating.
Century Aluminum last year bought the Sebree smelter from Rio Tinto, bringing the 200,000-ton-per-year operation into the orbit of Glencore, 41.7% owner of Century. The report doesn’t directly accuse this consolidation of contributing to the rise in physical premiums, but implies that the consolidation of production, warehousing and major trading players could be linked to the squeeze.
The reality is, therefore, that rather than warehouse queues being the sole cause of rising physical premiums, the main reason may be physical trades being caught on the wrong side of a supply squeeze, whether it is a managed squeeze or the result of a confluence of factors.
Whether it’s increased metal uptake by stock and trade deals, reduction in smelter capacity, rising end-user demand and restricted load-out from warehouses is unclear; but it does not yet appear to be because major end-users can’t get metal – although they will soon be howling about the physical premiums that they will have to pay for contracts that are linked to the Platts Midwest premium.
Rather, the premium rise is more likely due to a physical trader or traders caught out and having to bid for prompt delivery of metal. That may mean the spike will fall back shortly, but we wouldn’t want to take a bet on it.
What This Means for Metal Buyers
Consumers that can cover at last quarter’s – or even last month’s – premium should probably do so; it is likely to be lower than the current quarter. With the stock and trade deals soaking up available metal, there is unlikely to be a sudden and dramatic increase in metal availability to make physical premiums collapse anytime soon.