Why Falling Premiums Could Harm Aluminum Producers



Aluminum premiums could come down

In the previous part, we saw how aluminum premiums have almost doubled this year. However, aluminum buyers are up in arms against these premiums. There are allegations of rigging by warehouses to create an artificial shortage of aluminum. One of the reasons for these high premiums is the long waiting period to take delivery of aluminum. Let’s see why aluminum premiums could come down.

lme rules

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New warehouse rules

The London Metal Exchange (or LME) recently won a court case against Rusal. Please be aware that Rusal is the world’s largest aluminum producer. BHP Billiton (BHP), Rio Tinto (RIO), and Alcoa (AA) are the other major aluminum producers.

The new rules require warehouses to ship out more aluminum than they take in once the waiting period exceeds 50 days. This rule is expected to bring the excess inventories out of the warehouses. With inventories coming out of the warehouses, the artificial shortage of aluminum should come down. This can have a negative impact on aluminum premiums.

Aluminum premiums went as high as $500 per ton. Aluminum producers such as Alcoa (AA) reported higher profitability in 3Q14 on the back of high premiums.

Alcoa is working on a long-term strategy to increase its profitability. It is exiting the high-cost operations. Recently, it sold its stake in Mt. Holly Smelter to Century Aluminum (CENX). Currently, both Alcoa and Century Aluminum are part of the Standard and Poors depositary receipt (or SPDR) S&P Metals and Mining exchange-traded fund (or ETF) (XME).

Changes in LME inventories

It will be interesting to see the changes in aluminum inventories at the LME. We will discuss this in detail in our next part.


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