U.S. aluminium premiums falling back into line with Europe

More available aluminium means the surcharges that U.S. consumers pay are narrowing into line with costs paid in Asia and Europe, and the regional gap could be closed by the end of the year.

Strong U.S. demand for aluminium used in transport and packaging, long queues to get material out of London Metal Exchange approved warehouses and lucrative financing deals that kept metal out of the market have pushed up premiums, or the surcharge for obtaining physical material.

But supply barriers are crumbling rapidly, more metal is finding its way to the U.S. market and prices are already falling.

"The gap is starting to narrow ... It's still there, though it won't be by the end of this year," said Michael Widmer, metals strategist at Bank of America Merrill Lynch.

"The U.S. is a deficit market and the tightness was particularly pronounced because of long queues to get aluminium out of (LME approved) warehouses."

Regional price differences can be seen in premiums between the physical market and the LME's cash contract.

U.S. aluminium premiums fell towards $300 a tonne last week from record levels above $500 a tonne earlier this year. Widmer and Marco Georgiou, a senior analyst at consultants CRU, expect to see them fall to around $200 a tonne.

Premiums in Japan on the spot market have fallen to around $250 a tonne from near $330 mid-April. Duty-paid premiums in Europe have already crashed below $200 from $250-$290 in April and $370-$390 in early March.

"European demand is weak, Asia is oversupplied, while the U.S. market has a relatively stronger demand picture," said Caroline Bain, senior commodities analyst at Capital Economics. "China is producing more and I don't think that will change."

China's exports of semi-finished aluminium products rose 49 percent to 1.07 million tonnes in the first quarter, a jump of 353,000 tonnes from the same period last year.

The incentive to export created by higher U.S. premiums has been reinforced by Chinese authorities, which have removed tariffs on non-alloyed rods and bars, typically used in power plants.

Premiums will also come under pressure as more metal heads to market after the LME changed its rules regarding metal leaving and coming into U.S. warehouses.

"The queues are coming down and Chinese exports are rising," CRU's Georgiou said.

The profitablity of financing deals where investors sell aluminium for delivery at a forward date has been severely diminished.

"To get rid of the aluminium coming out of financing deals they are having to undercut the market," a trader said. "We heard there is some metal coming out of financing deals being sold at premiums below $300 (in the United States)."