Aluminum Price Premiums: Disconnect Between LME and Reality Continues

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Non-ferrous Metals

After spending most of this year moving within a narrow band, mostly sideways to lower, aluminum prices have surged over the past week, with the metal breaking above its 200-day moving average for the first time since March 2013.

Turnover over last week jumped, surging 66% over the average seen this year and although it dropped back towards the weekend, it has remained above average levels. Speculation in the rise in prices and surge of activity is related to the UK High Court decision to uphold Rusal’s block on the LME’s new warehouse rules.

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Indeed, load-out queues at the most affected warehouse locations, Vlissingen in the Netherlands and Detroit in the US, have increased as warrant cancellations continued to build, by 87,000 tons at Vlissingen, bringing the total to 1.534 million metric tons, according to Standard Bank. The FT reports cancelled tonnage has increased by 211,000 metric tons since the court ruling.

Although the court ruling has no doubt been a factor in the sharp rise in prices (approaching $1,850/ton for 3-month aluminum this week), they are unlikely to rise much further. The fundamentals, including a massive inventory overhang, remain in play and will cap appetite for medium to longer-term prices rises.

What may benefit from a continuation of the warehouse queues and the last hurrah of the stock and finance trade are rising spot premia caused by the gradual tightening of the physical market.

Smelter closures, led by Alcoa but increasingly finding traction among other producers either losing money or, worse, driven to bankruptcy, have finally begun to bite in Western markets. China aside, while there are millions of tons of metal held inside financing deals, most will remain there while interest rates remain low and the forward price curve remains supportive.

That will change in 2015 as the Fed has already indicated interest rates will likely rise, but it is far from clear if this will result in a flood of metal into the market or a more likely trickle developing, as some deals are rolled over and some aren’t.

What This Means for Metal Buyers

In the meantime, there is more to support the physical premiums remaining strong than to lift the underlying LME price much above current levels. The effect remains the same for consumers, of course; the delivered price isn’t likely to fall significantly in the short term; with persistently high physical premiums and a more buoyant LME price, the disconnect between the LME and reality will continue – but then that was Rusal’s desire all along.

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