Aluminium producers benefit as premiums soar

As the world aluminium supply continues to tighten, the premiums on the metal continue to rise. Analysts and industry experts believe these premiums will continue to stay on a high, at least for the next two years which is good news for India’s aluminium producers like Hindalco and NALCO.

Premiums that are charged over the LME price are usually to cover the transport and the insurance costs at the same time reflecting a region’s demand and supply but for the past few months the premiums have been 2-3 times the transport costs underlining the serious market scarcity.

It is not like there are no aluminium stocks in the world. The London Metal Exchange has started to mobilize its stocks from its authorized warehouses which had been stuck in queues for months. The off-exchange warehouses are not governed by any rules so there is no knowing when they will dispel their stocks which they are holding onto in anticipation of higher premiums.

Meanwhile in the LME warehouses, they are only allowing a discharge of 3,000-4,000 tonne metal daily so it will take a while to disperse the accumulated stocks.

It is believed that LME and off-exchange warehouses hold estimated stocks close to 8-9 million tonnes according to analysts.

The high premiums thus are likely to continue or maybe spike a little higher in the near future are market supplies tighten further. However, this premium could be stabilized by the market forces if a backwardation occurs, where the spot prices are more than future prices, or if the producers increase supply cutting back the scarcity.

These high premiums have benefitted the aluminium giants of India like Hindalco and Nalco as both have reported strong revenues on a YOY basis. Hindalco has reported a staggering 41.5% gain in revenue largely owing to the high premiums.