Aluminum premiums settle after rout, consumer buying supports

Surcharges for physical aluminum have settled close to equilibrium levels after tumbling by up to three-quarters this year, supported by consumer buying and more attractive conditions for financing deals.

Tapering Chinese exports of the metal will also help stabilize surcharges; a glut of aluminum had been a big factor in setting off a slide in premiums late last year and early in 2015.

The surcharges, or premiums, which consumers pay on top of the London Metal Exchange cash price for immediate delivery of metal, have settled closer to levels seen several years ago before a sizzling rally sent them to record highs.

"Everybody's looking for some stabilization, both producers and consumers don't want to see this volatility any more," said a trader in Europe. "If you look at historic levels, we're not far away from those."

In Europe, premiums paid over the London Metal Exchange cash price were quoted at $180-$190 a ton for duty-paid material in Rotterdam, recovering from lows of around $130 last month after tumbling from a peak of $500 in November 2014.

"This is a more normalized range, reflecting the cost of transport and everything else, but it's hard to know whether it will remain here," said a producer source.

Consumers, who had held off buying to wait for premiums to slide even further, have been forced back into the market as they run low on metal, helping to underpin the surcharges.

"There's been a huge wave of consumer buying. We sold a lot over the past several weeks," said a trader in London.

Another factor has been a steeper forward curve on the LME, boosting the profitability of financing deals, which lock up metal in warehouses, taking material off the market.

"I think you probably need the forward curve to steepen a little further in order to encourage more financing trades to be put on," said Nic Brown, head of commodity research at Natixis.

Another element was shipping metal from Europe to the United States by investors to take advantage of higher U.S. premiums.

"There's been a bit of premia arbitrage going on... which would have given some support to premia here, while we could see further downside in the U.S., but not much," said analyst David Wilson at Citi in London.

Current U.S. premiums, based on the nearby CME premium contract are 8.35 cents/lb ($184 per ton), down from a record of 24.25 cents in February.

Further support for premiums should come from an expected decline in Chinese exports of aluminum, traders and analysts said.

Chinese exports of unwrought aluminum and products have surged 35 percent so far this year to 2.06 million tonnes but weaker international prices are expected to dampen shipments in coming months.