Aluminum premiums in Europe seen mired at low levels on big supply

Surcharges for physical aluminum in Europe are due to remain weak after retreating in recent weeks, weighed down by overproduction, new rules that force more outflows from warehouses and difficult conditions for financing.

A constant flow of metal out of warehouses registered by the London Metal Exchange is due to increase after new LME rules designed to slash backlogs twice as quickly as under previous reforms took effect at the start of August.

"There's good metal availability both as the result of the continued overproduction, but also as a result of the expected greater outflow from warehouses as the LME decay factor has increased," a trader said. "Premiums have come back down again after the temporary strength we saw in Europe."

The surcharges, or premiums, which consumers pay on top of the LME cash price for immediate delivery of metal, have tumbled as much as three quarters since record peaks last year. European premiums were quoted at $115-$135 a tonne for duty-paid material in Rotterdam, retreating from $180-$190 in June and from a peak of $500 in November 2014.

Backwardation crimps finance deals

The market is awash with supplies. Aluminum output in China, the world's biggest producer, climbed 12 percent during the first seven months of the year.

Another trader said the demand side of the market was holding up, but a flood of supply was overwhelming the market. "Demand's not really bad, it's reasonable. In areas like automotive it's pretty good, rolling is reasonable and extrusion a bit weaker," he said.

LME cash aluminum is at a premium of $20.25 a tonne to the three-month contract, compared with a discount of $44.50 in late July. Under those conditions, financing deals were not profitable, so additional material has been finding its way to the physical market that otherwise would have been locked up in those transactions.