Novelis hits out at rising premiums for aluminium

The world’s largest buyer of aluminium, Novelis, has hit out at rising prices for the metal, saying that record premiums payable are “indefensible” and give “the appearance of an engineered squeeze” in the North American market.

US Midwest premiums – the amount payable on top of the official exchange price for immediate delivery of aluminium – rose to 20-21 cents a pound last week, according to the consultancy CRU. That translates to about $450 a tonne, or more than a quarter of the London Metal Exchange (LME) cash price of $1,726 a tonne.

European and Japanese premiums have also risen to new highs, which is good news for producers and traders stockpiling metal, and suggests a tight market.

But Novelis, which makes rolled aluminium sheets for use in car bodies and beverage cans, said the shortage was “temporary and artificial”. Although producers have made cutbacks and usage is rising, the aluminium market remains in a large surplus, with 10m-15m tonnes of metal in warehouses around the world.

“There is more than enough metal to meet the higher consumption levels, but it continues to be held off-market by those who benefit from financing deals and the appreciation in premiums,” said Nick Madden, chief supply chain officer at Novelis. “This increase in costs ultimately does flow down through the supply chain to the end consumer.”

Warehouse queues for aluminium – the number of days it takes for customers to gain access to the metal they own – have been rising steadily since 2009.

At the large LME warehouses in Detroit, most of which are owned by a Goldman Sachs subsidiary, Metro, it takes 570 days for metal to be released, according to CRU. While the warehouse companies earn rent, owners of metal warrants can take advantage of the aluminium market “contango”, where prices for future delivery exceed current prices, to sell the metal forward for a small but safe profit.

Novelis said the situation had recently been exacerbated by some American smelters reportedly “withholding metal from the market and placing it in storage, even though there is demand from fabricating plants in the region”. These factories instead had to source metal from Canada, and are still subject to the Midwest premium, Mr Madden said.

Besides their costs increasing, large aluminium consumers dislike high, volatile premiums – used as a pricing guide across the market – because they expose them to greater risk. The LME aluminium price can be hedged on the exchange, but the derivatives market for the premium is much less liquid and developed.

The aluminium warehousing controversy has already attracted the attention of US regulators, which are looking at the role of Wall Street banks in physical commodity trading.

The LME last year announced new rules, effective from April, that are intended to reduce queues. Instead, they have lengthened.

In Europe, queues at the Vlissingen warehouses in the Netherlands, owned by Glencore Xstrata subsidiary Pacorini, now run to 555 days, while the duty paid premium has risen to $330-$340 a tonne, CRU says. In Japan, the premium is about $300.

“The LME warehouse queues are still distorting the market,” said Eoin Dinsmore, senior analyst at CRU. “But we expect to see premiums reduce in the coming months as larger tonnage deals are concluded.”