No question that the biggest story for aluminum buyers over the past several days is the First Great Premium Hike of 2014.
The FT reported last week that aluminum physical delivery premiums had surged even higher in the US, to an eye-watering US$0.19/lb (or US$ 419/metric ton), quoting the Platts Midwest benchmark transaction price.
The paper suggests this is because industrial consumers in North America decided to defer some of their purchases, betting that premiums would fall because of the LME’s proposed warehousing reforms and have now found themselves on the wrong side of a physical metal squeeze. Both this article and another from Reuters’ Andy Home details how load-out queues at LME warehouses, rather than shrinking after the LME’s rule change announcements, have actually increased.
At Detroit, the worst “offender” in the LME system, warehouses have received a further 100,000 tons more metal in than they loaded out since July, and as a result, queues are at a nominal 410 working days, assuming a load-out rate of 3,000 tons per day. Morgan Stanley estimates that queues are at 650 calendar days, 100 more than back in July.
Warehouses load out on working days, but charge for calendar days. Some nifty math by Reuters, though, shows the warehouse rent gain from the queue has moved out of line with the Midwest premium. The rent on a ton of aluminum canceled today would be around $275 until it is ready for loading onto a truck, which will cost another $39.95.
The total cost of getting aluminum out of Detroit, therefore, is around $315 per ton.
In an effort to counter the loss of queue revenue, however, Metro is putting up their daily storage costs from the start of April, when JPMorgan’s warehouse subsidiary will increase its aluminum rent from $0.48 per ton per day to $0.51.
With queue revenue at $315/ton and the physical premium at $419/ton, the apparent linkage between the two seems to have broken down, Reuters suggests, and underlining the warning for consumers that the premium is not going to dissipate once the new rules come into force in April.
So what the heck is causing the surge in physical premiums?
As we wrote very recently, strong demand and smelter closures have certainly played their part.
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