The rates to obtain aluminum tumbled the most in 20 months in Europe last month and retreated from a record in the U.S. as lawmakers and regulators scrutinize long lines for metal that buyers say raised their overheads.
The surcharge added to the price of aluminum for immediate delivery on the London Metal Exchange slid 7 percent in Europe, the most since November 2011, according to Metal Bulletin data. U.S. costs dropped as much as 23 percent from a record in June, Harbor Intelligence in Austin, Texas, says. Premiums may fall 25 percent more by year-end at this pace after the LME submitted plans to ease a backlog of metal, Barclays Plc estimates.
Consumers led by brewer MillerCoors LLC told a U.S. Senate hearing last month that banks and other warehouse owners are using “unfair” LME rules to slow deliveries. The LME, which oversees more than 700 warehouses worldwide, proposed rules July 1 to cut waiting times. The LME and Goldman Sachs Group Inc., which owns exchange-approved warehouses, are restraining aluminum supplies and driving up prices in violation of federal antitrust law, according to a lawsuit filed in Detroit Aug. 1.
“The fall in physical premiums for aluminum over the past two weeks is, in our view, only the beginning of this process,” Peter Richardson, an analyst at Morgan Stanley in London, said in a report e-mailed today.
The aluminum premium was $250 to $275 a metric ton in Rotterdam last week, compared with $270 to $295 in June, London-based researcher CRU said. The premium aluminum buyers are expected to pay in the U.S. Midwest fell to 10 cents to 11.7 cents a pound from a record 12 cents to 13 cents a pound in June, Harbor Intelligence said.
The LME proposed obliging warehouses where withdrawals take more than 100 days to deliver out more metal than they take in. That spurred warehouse companies to curb incentives because they’re less certain about future income in view of potential changes to delivery rules, CRU said. Detroit, New Orleans, the Dutch port of Vlissingen, the Belgian city of Antwerp and Malaysia’s Johor have waits for metal exceeding 100 days, according to Barclays.
Hong Kong Exchanges & Clearing Ltd., the owner of the LME, and New York-based Goldman said separately that the suit is without merit and they will contest it “vigorously.”
Goldman’s Metro International Trade Services LLC owns the most LME-approved warehouses in Detroit, the world’s second-largest aluminum repository. The lawsuit against the bank and the LME was by Superior Extrusion Inc., which is seeking class-action status.
Goldman and LME restrained about 1.5 million tons of aluminum in LME Detroit warehousing, “through an interconnected series of agreements in unreasonable restraint of trade,” causing delays of as long as 16 months between customer orders and corresponding deliveries, Gwinn, Michigan-based Superior alleged.
Metal premiums are added to exchange benchmarks and cover a purchase of specific quality of metal in a particular location, reflecting local supply and demand on the physical market, according to Macquarie Group Ltd. in London. The European aluminum premium accounts for 13 percent of the total cost of buying metal, compared with 7.6 percent three years ago, according to Bloomberg calculations based on Metal Bulletin data. Companies don’t usually protect against changes in premiums through hedging.
Global aluminum costs were inflated by $3 billion in the past year through unfair rules that allow warehouse owners to slow deliveries, Tim Weiner, a global risk manager at Chicago-based brewer MillerCoors, said in written testimony before his appearance July 23 at a U.S. Senate hearing. U.S. financial regulators told a Senate hearing July 30 they will boost scrutiny of banks’ commodities holdings and the Federal Reserve said last month it will review a decade-old decision to let them trade raw materials. The U.S. Commodity Futures Trading Commission sent a letter to companies asking them not to destroy documents relating to warehousing since January 2010, according to a copy of the letter obtained by Bloomberg.
Premiums had climbed to a record as wait times for aluminum at LME-approved warehouses extended to more than a year. Supply was further limited because as much as 80 percent of LME stockpiles are tied to financing transactions and not immediately available, Societe Generale SA estimates. Warehouse operators offered incentives to attract metal into their sheds, leaving consumers to compete for metal.
The LME’s proposed rules will take effect April 1 if they’re approved by the exchange’s board at a review in October.
“If the changes are adopted, we think the markets most impacted by these changes will be in already oversupplied aluminum and zinc,” Richardson of Morgan Stanley said. “Given the substantial amount of metal in these warehouses, the LME system would temporarily become a supplier and we expect increased availability of physical metal to exert downward pressure on the LME price.”
Aluminum for delivery in three months dropped 0.4 percent to $1,801.25 a ton by 3:02 p.m. on the LME. The metal fell 13 percent this year. Production will exceed demand for a seventh consecutive year, according to Morgan Stanley. Zinc fell 0.5 percent to $1,856 a ton, and is down 11 percent this year.
“Reported premiums in Europe and North America do appear to be softening, part of which can be explained by seasonal factors with the summer months traditionally slower, and part by stock holders choosing to reduce some of their positions on the basis of their expectations of the LME rule changes,” Steve Hodgson, director for sales and marketing at United Co. Rusal (486), said.
Moscow-based Rusal is the world’s biggest producer of aluminum. European producers of the metal used in beverage cans and cars will suffer the most from a drop in premiums, Barclays said Aug. 1. A $200 drop in premiums may cut aluminum output outside China by 600,000 tons within six months and by 1.8 million tons in a year, the bank said. Most cutbacks would occur in Western Europe, it said. Global aluminum production will be 50.5 million tons this year, Morgan Stanley says.
Goldman Sachs offered July 31 to speed up delivery of aluminum to users of the metal and proposed changes to industry rules. Consumers should have priority over other clients in getting aluminum out of LME warehouses, it said. Novelis Inc., a maker of aluminum parts for The Coca-Cola Co. (KO:US) and Ford Motor Co., said Goldman’s offer to speed up deliveries will provide “no benefit” to industrial users stuck paying higher premiums because of long delays.
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