Aluminum physical delivery premiums at record levels

Aluminum producer Norsk Hydro AS A's Chief Executive Svein Richard Brandtzaeg said that premiums for the physical delivery of aluminum had risen to record levels this year amid a tighter market, a rise that could continue for the rest of the year.

"There's been a surplus situation for many years, but now we are in a situation where there's a deficit of aluminum, which right now is about 1 million tons in the world outside of China," said Mr. Brandtzaeg.

Global demand for aluminum, excluding China, increased 4% on the year in the second quarter to an annualized 27.5 million tons, while production is expected to reach about 26 million tons this year, Norsk Hydro said.

"This is because of curtailments to production, but also high demand growth," said Mr. Brandtzaeg.

Aluminum prices at the London Metal Exchange dropped 2% on the year in the second quarter, but the drop was compensated for by record-high premiums for the physical delivery of aluminum to factory doors, amid delivery constraints at global aluminum warehouses.

Premiums rose to above $400 per metric ton in the second quarter in Japan, the U.S. and Europe, said Mr. Brandtzaeg, and if the market remains tight, "we see a possibility that they may increase further."

Premiums have kept rising in the third quarter, to between $450 and $460 a ton this week, Norsk Hydro said. The company's Chief Financial Officer Eivind Kallevik said there could still be an upside to premiums, but he declined to quantify it.

"As long as there's a deficit of metal, with long queues at the LME warehouses, we'd expect premiums to stay at a decent level," Mr. Kallevik said.

He said big warehouses had started to deliver more aluminum, with LME inventories dropping to 5.1 million tons from 5.4 million tons during the quarter, but that capacity was still limited, with a delivery time of nearly two years from major warehouses in Detroit and Vlissingen in the Netherlands.

An executive at Russian aluminum producer Rusal said last month he expected premiums to reach a new record of between $500 and $550 a ton in the next two or three months.