Falling premiums hit big aluminium trading houses

More than the aluminium prices that have declined to six-year lows, it is the sharp fall in “premiums” that is hurting the big trading houses like Glencore and Noble Group.

Commodities trader and miner Glencore recently cited the “tough metals trading conditions, particularly aluminium and nickel affected by the collapse in physical premiums” as the main causal factor behind the declining earnings of its marketing division.

Noble Group’s metals division has been hit badly too. The Asian commodities trader’s profits before interest and tax in its metals and mining segment fell 98 per cent in the first half of the year. Company officials said the division “had a very difficult quarter as premiums for metals in key distribution locations weakened sharply, impacting the overall business and resulting in a loss”.

Over the past few years, premiums have ranged from about $150 to $350 a tonne for aluminium, a small percentage of the overall price but a big part of traders’ profit margin. But in the US, the Midwest premium has fallen 67 per cent this year. It is now at its lowest level since January 2012, according to CRU, close to $170 a tonne. In Europe, the premiums are trading near levels last seen in 2010.

It is difficult to hedge the premiums than it is the London Metal Exchange (LME) price. The CME in the US runs a US Midwest premium contract, but traders say it is not large enough to hedge big stockpiles of metal. The LME is working to launch an aluminium premium contract in November.

Aluminium premiums have also declined because of the tough rules proposed by the LME that force registered warehouses to offload more metal and cap the rent amount they can charge.