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ANALYSIS-Aluminium consumers face price disappointment

Jul 26th 2015 at 7:50 PM


* Premiums rise in Europe, U.S. and Asia * Aluminium best performing LME metal since Nov 1 * Market oversupply to remain, but deals will support prices By Maytaal Angel LONDON, Dec 18 (Reuters) - Consumers betting on lower aluminium prices next year could be disappointed because most of the financing deals that have tied up stocks are likely to be renewed, keeping material out of an oversupplied market. About 70 percent of the record 4.6 million tonnes of stocks sitting in London Metal Exchange warehouses are tied up in these deals and some expect their expiry in May to result in lower aluminium prices -- up about 45 percent so far this year. But that is unlikely. Traders cite fierce competition for material stored in producer warehouses. "Most of the deals will be renewed. Producers see them as a good thing, brokers get money, warehouses make money, everybody wins," said Calyon analyst Robin Bhar. "Companies are still coming to us talking about financing deals so (their) appetite hasn't diminished." Prices of benchmark LME aluminium, used extensively in transport and packaging, are up about 45 percent this year -- despite record stocks -- to about $2,240 a tonne on Friday. They hit a 14-month peak of $2,305 on Monday, supported also by rising physical premiums in Europe, the U.S. and Asia because of tightly held LME stocks and record low stockpiles at Japanese ports. Premiums are paid by consumers over and above the LME cash price to cover the costs of shipping and delivering aluminium. The premium in Europe recently rose to about $95 a tonne, a level last seen in August 2008. A TYPICAL DEAL A typical deal consists of banks buying nearby aluminium from a producer, selling it forward at a profit and striking a warehouse deal to store it cheaply for an extended time period. The deals are a good way for producers to raise money fast. Many of these deals were signed last May for a year. At that time the contango or premium for material deliverable in May 2010 over the three-month contract was $150 a tonne. That represents roughly a 10 percent profit excluding warehousing costs, given prices at that time were around $1,500 a tonne, much higher than the low interest -- near zero -- that can be earned in money markets. "You still see them being done now," said Michael Widmer, analyst at BofA-Merril Lynch. "Warehousing costs are more or less fixed. Our forecast is, next year interest rates remain low. The curve will remain in contango and you could see some deals renewed." A QUESTION OF PREMIUMS There is a risk, however, that if premiums keep rising, some producers will be tempted to buy back their metal from the banks and sell it on the physical market. A lot then rests on demand, which many analysts expect will pick up to around 37 million tonnes next year from 35 million tonnes this year, as global economic recovery, particularly in top consumer China, gathers pace. "China continues to offer strong signs, Brazil as well, and there's improving signs in the U.S. and Europe," said Barclays Capital analyst Nicholas Snowdon.  But the problem is, aluminium supply is also surging. Global aluminium output ran at an annualised rate of 38.4 million tonnes in October, according to the International Aluminium Institute. It was the best operating rate since September, 2008. Analysts do not expect supplies to tighten to the extent that premiums rise to levels where financing deals are all suddenly unwound. Rising premiums could, however, see some of those deals unwound slowly, but the extra material released would mean prices and premiums level off. "If the incentive to release metal grows, it (eventually) puts pressure on spot prices and the contango starts to widen so you get repurchase of metal by the same institutions," said Daniel Brebner, analyst at Deutsche Bank "The market is likely to surprise in terms of how long this metal remains tied up."



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