Bloomberg News

Aluminum Premium Gains Fueled by LME Rules, Harbor Says

June 22, 2011

(Updates with analyst comment in sixth paragraph and premium forecast in 14th paragraph.)

June 22 (Bloomberg) -- London Metal Exchange rules are creating delivery bottlenecks for aluminum that are boosting prices and causing seven-month delays at Detroit warehouses, commodity researcher Harbor Intelligence said.

Warehouses monitored by the LME, the world’s largest metals exchange, are obliged to deliver a minimum of 800 metric tons to 1,500 tons daily, even as global stockpiles of aluminum rose almost fivefold to 4.57 million tons since the end of 2007. Detroit’s warehouses hold 25 percent of LME-monitored inventory. The premium paid in the Midwest to get the metal on top of its cash price surged to a 16-year high last month.

The LME’s minimum-delivery rule “is one of the factors that, without a doubt, is behind record high Midwest premiums,” Jorge Vazquez, a senior vice president at Harbor Intelligence, said yesterday in an interview in Chicago. The higher premium “implies consumers paying a higher price for aluminum.”

Aluminum for delivery in three months has climbed 30 percent in the past year, and in May rose to the highest level since August 2008. The metal advanced $9, or 0.4 percent, to $2,550 a ton today on the London Metal Exchange.

Bottlenecks in the U.S. warehousing system combined with the use of aluminum for financing deals may have cut the amount that’s available even as total LME stockpiles remain near a record. Detroit, a city associated with the auto industry, is the only site holding more than 900,000 tons of the metal, according to exchange figures.

Cash Rates

“Notionally, metal is not in short supply, but a lot of it’s not available for immediate consumption because of the way the warehouses are taking advantage of the LME rules, especially Detroit,” David Wilson, a director of metals research at Societe Generale SA, said in an interview in Chicago today. “That’s keeping premiums high.”

The premium that buyers pay over cash rates to get supplies surged 37 percent this year and touched 9.5 cents a pound on May 6, the highest since February 1995. The premium averaged 5.7 cents in the past three years.

Global aluminum stockpiles monitored by the LME surged to a record 4.71 million tons on May 18.

Starting April 1, minimum daily delivery sizes will increase to 2,000 tons for sites holding between 300,000 tons and 600,000 tons, and 2,500 tons for sites with 600,000 tons to 900,000 tons, the LME said last week in a notice to members. The board “will give further consideration” to the proposal to raise minimum delivery rates for stockpiles above 900,000 tons.

Pressure to Change

“There’s a lot of pressure on the LME to change the rules in a way that at the end of the day more metal is available and faster,” Vazquez said. “The bulk of the problem is Detroit, and right now, the LME is debating how much they should increase the outload rate specifically for Detroit.”

The LME, which handled $11.6 trillion worth of contracts last year, hired Europe Economics to study deliveries and announced the report results in May. According to the proposal, warehouses storing at least 900,000 tons of metal would be required to release at least 3,000 tons a day.

An increase in metal deliveries required of warehouses with very large stocks should produce a more balanced distribution of inventories, reduced premiums, shorter lines and a “more rational” set of prices, Europe Economics said. Its study included 46 interviews and visits to 12 warehouses in Europe, Asia and North America.

Premium Outlook

The LME is going to change the rule and will probably revise the requirement to 3,000 tons, and it likely won’t go into effect until April, Vazquez said. Once that is approved, that will only help the premium “a little bit,” he said.

“Premiums in 2012 could still reach a new high given the tightness in the Americas that comes from growing demand in the entire continent, while Brazil and Venezuela are producing at lower run rates than last year and as no new capacity will hit the market soon,” Vazquez said. He also cited “booming demand” in the Americas.

Midwest premiums may rise as high as 13 cents next year, Vazquez said during a question-and-answer session at the conference today.

High diesel prices, a shortage of trucks and the tightness in the aluminum market also are contributing to the premium gains, Vazquez said.

“People are mostly buying hand-to-mouth,” he said. “That implies when they want metal immediately, they’re really struggling to get it.”

--Editors: Steve Stroth, Millie Munshi

To contact the reporters on this story: Elizabeth Campbell in Chicago at ecampbell14@bloomberg.net; Yi Tian in New York at ytian8@bloomberg.net

To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net


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