Breakthrough: LME Aluminum Physical Delivery Premiums Finally Falling

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Could this be the beginning of the end of overblown aluminum physical delivery premiums?

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Consumers certainly hope so, and although it’s long been predicted the sudden fall in European physical delivery premiums has taken the market by surprise. According to Reuters, premiums paid over the LME cash price were mostly quoted in a range of $385-$420 a metric ton for duty-paid material in Rotterdam, compared to premiums of $430-$480 just last week.

Premiums in Japan are also due to slip, sources in the region are quoted as saying. European premiums along with those in Japan and the US Midwest soared more than 60% last year due to rising demand and supply cutbacks from Western producers while millions of tons of inventories were locked up in financing deals and in warehouse backlogs.

Speculation is ongoing as to what is behind greater availability but most attribute it to a combination of slow demand in Europe, rising exports from China and traders/funds being unable to roll material over in financing deals due to the flat forward curve on the London Metal Exchange. Reuters reports Europe was being pressured by material from China, whose exports of unwrought aluminum and aluminum products jumped 38% in December to 540,000 mt from the previous month.

Even if most of that was semi-finished products it will be displacing production in Europe and reducing local European primary metal demand. We have been predicting a combination of these developments would eventually undermine the physical delivery premium but it remains a tough call as to whether premiums will continue falling.

Buyers are well stocked from Q4 but, as Reuters observes, when they come back into the market for Q2 supply it could raise demand and put a floor back under the premium for now. But the combination of rising Chinese supply, metal leaking out of financing deals and sluggish European demand does seem like a cocktail that could continue well into the summer and, coupled with new load out rules for LME warehouses, may be enough to continue the decline in premiums this year. I expect we are not alone in hoping that proves correct.

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