Europe's aluminium premiums approach record despite LME reforms

Europe's aluminium premiums - or costs to get metal out of storage - are approaching record highs despite reforms aimed at stemming them, as persistent use of material for collateral in financing deals squeezes availability.

Premiums had fallen to their lowest in a year late in September, before an embattled London Metal Exchange (LME) beefed up its powers to free-up access to backlogged metal, but costs have steadily risen since then.

Aiming to appease critics of its global storage network, the LME in November slashed maximum wait times for metal, boosted its powers to act against market abuse and said it would review its agreement with warehouse owners.

But duty-paid aluminium premiums in Rotterdam climbed to $250-275 a tonne in December, from around $235-255 a tonne in September. Premiums, paid over the LME cash price to secure physical metal, were at record highs of around $300 a tonne in the first quarter of the year.

Traders said the rise highlighted limits on the exchange's power to cool a market where low interest rates continue to whet appetites for locking up metal as a form of investment.

"The (financing) deals will still be there. The LME has no power over this. As long as there is cheap money around, nobody is going to make this disappear," a European aluminium trader said.

Financing deals involve an investor borrowing money at low rates to buy physical aluminium, striking a warehouse deal to store it cheaply and taking advantage of the market's contango structure to sell it forward immediately at a profit.

Analysts believe most of the estimated 10-15 million tonnes of global aluminium stocks are locked up in such deals.

Cash prices of aluminium are trading at a $46 discount - or contango - against the benchmark three-month futures . It has been in contango all this year.

On Wednesday, the U.S. Federal Reserve trimmed the pace of its monthly asset purchases, by $10 billion to $75 billion, and sought to temper the long-awaited move by suggesting its key interest rate would stay at rock bottom even longer than previously promised.

"The Fed announced tapering but not tightening so they will keep interest rates low," another physical aluminium trader said.

"For investors to make some money they have to look for alternative investments, and LME financing deals are one of the few opportunities they still have."

The LME, the world's biggest industrial metals marketplace, announced a tougher warehouse policy on Nov. 7 to cut queues for delivery to a maximum of 50 days from over a year in some cases. The move followed persistent complaints from metal buyers about the high premiums they had to pay.