Investment banks in the aluminium market surging the premiums to record high

The arrival of investment banks in the aluminium market has triggered a shake-up in the $100bn industry that is forcing producers from Alcoa to Rusal and consumers such as BMW and Coca-Cola to change the way they do business.

The increasingly dominant role of banks including Goldman Sachs, JPMorgan and Deutsche Bank – as well as traders such as Glencore – has prompted a surge to record levels in the premium consumers pay for metal over the benchmark price set at the London Metal Exchange.

Aluminium is the second most widely-used metal after steel, found in everything from aircraft to fizzy drinks cans. For years, the market has been a low-profile business handled by specialist merchants and producers, but in recent years investment banks have become more involved.

The banks can lock in a guaranteed return by storing the metal in giant warehouses, allowing them to bid up prices for the metal and remove supplies from the market.

The process has pushed premiums for physical aluminium to record highs in excess of $250 a tonne, up by more than half since the start of the year. As a percentage of the aluminium LME price, global premiums are at a record 13 per cent, after averaging 5 per cent between 2007 and 2011.

The wild moves in aluminium prices will be the main topic of discussion at the industry’s largest annual gathering which begins Thursday in Moscow.

Executives and traders said that because of the dramatic moves in premiums, producers and consumers of aluminium were likely to move away from their traditional annual contracts set at fixed premiums to LME prices.

“Producers are looking to sell on shorter term or floating premium,” said a trader at one large aluminium producer. Traders and analysts said that consumers would also probably seek shorter-term deals.

The situation has been exacerbated by long queues to withdraw metal from warehouses registered with the LME, which sets the rate at which companies must deliver it out.

Goldman, JPMorgan and Barclays have all bought LME warehousing groups, as have traders Glencore and Trafigura.

Traders estimate that the large majority of global inventories, which stand at more than 10m tonnes, enough to build 150,000 Boeing 747s, are tied up by banks or traders.

Oleg Deripaska, chief executive of Moscow-based Rusal, writes in the Financial Times that about 65 per cent of LME’s aluminium stocks were tied-up in financial deals.

“The last two to three years has witnessed the increasingly influential role that financial institutions are having on the aluminium price,” he wrote in an opinion column on the Financial Times.

Michael Widmer, metals strategist at Bank of America Merrill Lynch, described the market as “not orderly”. “What a lot of consumers say is the way the LME is operating at the moment is not right for the metals industry,” he said. “The current negotiating season for a consumer it is extremely difficult.”