Indian companies getting high premiums despite low aluminum price

Vedanta Resources said it has sold 3,000 tonnes of aluminium ingots at a premium of $220 a tonne over the London Metal Exchange (LME) price in the Asian market.

India's state-run National Aluminium Company (Nalco) has also sold 8,000 tonnes of aluminium ingots at a premium of $202.80 per tonne premium over the LME price.

Earlier this month, the company had sold 4,500 tonne of aluminium ingots at about $180 per tonne premium over the average LME cash price. Buyers tend to pay a premium in addition to the LME cash price to cover freight and insurance and to reflect regional supply and demand.

Last Thursday (June 21), aluminum prices on the LME hit a two-year low. But for Indian firms, the time has been ripe to ink new deals.

Novelis Inc, the world's leading producer of premium aluminum rolled products, signed an agreement with the Changzhou National Hi-Tech District to build the company's first automotive sheet manufacturing facility in China. With a capacity of 120,000 metric tonnes per year, the plant will cater to the rapidly expanding Chinese automobile industry.

Novelis expects demand for aluminium in the global automotive sector to grow at a compound annual rate of 25% over the next five years.

In 2007, Novelis was acquired by Hindalco Industries and became part of the Aditya Birla Group in India. The latter already has announced investments of $1.3 billion (Rs 70 billion) to set up new facilities and expand the capacity of existing units.

In India, Vedanta Resources has said the increase in premiums over the LME was an outcome of global ``tightness in the physical market due to closure of smelters in recent quarters in the wake of low LME prices''.

In a statement, the company said aluminium premiums were also increasing because of ``highly profitable financing deals and business consumers have to compete with warehouses to get hold of metal from producers.''

Analysts added that LME prices have remained subdued because of the current economic situation in Europe, but record high premiums are helping Indian companies. They said that an acute shortage of supply has prompted buyers to speed up settlements, since producers were cutting back output. As demand remains strong, supply of accessible metals has been reduced considerably. Buyers are targeting ingots due to worries about short supply.

According to the US Service Center activity, 136,100 tonnes of aluminum products were shipped by US Service Centers in May, an increase of 6.8% from the same month in 2011. For 2012 year to date, aluminum shipments were 664,200 tonnes, an increase of 5.6% from the same period in 2011.

Inventories of aluminum products were 385,700 tonnes at the end of May 2012 an increase of 6.3% over May 2011 and an increase of 2.3% from April 2012.

Vedanta Group, India's largest aluminium producer, said premiums in the US and Japan have already reached their record-high levels and the scenario is expected to continue unless there is an increase in interest rates or reduction in LME spreads.

Aluminium prices are hovering around $ 1,878.50 to 1,920.50 a tonne on the LME.