European aluminium market faces 2014 tightness as premium arbitrages come into focus

Aluminium market sources are becoming more concerned that high freight costs and comparatively low premiums will keep metal away from Europe next year, leading to a shortage of aluminium on the continent.

“Japanese premiums are at $240-250 [per tonne], the USA is at $220 and yet Europe is below $200,” a producer said. “Europe is also the most unfavourable place to deliver to because freight costs are the highest. There’s going to be tightness next year.”

European premiums fell in July and August after the London Metal Exchange announced proposed changes to its warehousing rules, which saw cuts to the incentives offered by warehouses for deliveries, and thus to premiums as well.

Premiums have since firmed as the market came around to the fact that any real market impact from the rule changes will not likely be felt until after their implementation in April next year. But European premiums remain well below those in North America and Asia, and volumes coming into Europe have fallen as a result.

“Rotterdam is becoming tight for good western ingot,” a trader said. “With premium arbitrages now really coming into play, we’re paying a price in Europe for having lower premiums over the past month.”

Premiums are still strengthening in Europe, with duty-unpaid business reported as high as $210 per tonne this week, and duty-paid metal selling in volume at $270 per tonne.

Unpaid material is especially strong, with demand from numerous financial institutions still interested in long-term financing deals.

“Everyone is looking for unpaid for financing,” the trader said. “We have five or six banks on the phone every day looking to lock away metal for one or two years.”

Some consumers are reacting to the forecast tightness by securing full-year volumes for 2014, rather than quarterly or half-yearly tonnages, as has become the norm this year.

“We did a 2014 contract [with a consumer] for the full year, which we were happy to get at a fixed premium,” a producer said. “In the last two weeks, we did a lot of floating contracts.”

Some consumers are planning to buy on a quarterly basis in 2014, with each quarter’s premium negotiated separately during the year, because of the expectations that premiums will fall after the new LME rules are implemented in the second quarter.

But the supply tightness could limit any fall in the premiums, leaving consumers to pay consistently high numbers to secure metal in 2014.

“I’m not a believer that the high premiums will be maintained, but they certainly rebounded much harder than expected,” the trader said. “I feel for customers that were waiting for premiums to fall [before buying for 2014] because it rebounded in their face. The margins are looking really tight next year.”