Aluminum Industry Seen by JPMorgan Unprofitable on LME Rule

Aluminum Industry Seen by JPMorgan Unprofitable on LME Rule

Two-thirds of aluminum producers would be losing money because of lower premiums paid on top of exchange benchmarks if the world’s biggest metals bourse approves rules to cut waiting times at its warehouses, according to JPMorgan Chase & Co. Premiums to obtain the metal will drop 60 percent to about $100 a metric ton as a result of the new rules the London Metal Exchange is expected to approve in October, Benjamin Defay, an analyst at the bank in London, wrote in a report e-mailed today. The LME proposed to oblige warehouses where waits extend for 100 days or more to let more metal out than they take in.The premium that some U.S. buyers paid to get metal rose to a record this year even as global output outpaced demand and stockpiles approached 5.5 million tons, enough to supply North America for 10 months. Consumers led by MillerCoors LLC told a U.S. Senate hearing last month that some warehouse owners are using “unfair” LME rules to slow deliveries.

“We estimate about 75 percent of the industry would be loss making if premia were to fall to $100 a ton versus $250 today,” Defay wrote. “It is plausible that prices fall even further for a period as the market rebalances.”

An even bigger drop in premiums would make more than 90 percent of the industry unprofitable, which JPMorgan “would not completely discount,” according to the report. About 60 percent of the aluminum industry is losing money even with higher premiums, according to JPMorgan.

LME Proposal

The LME, which monitors more than 700 warehouses, will introduce the new rules from April 1 if they are approved by the board in October. U.S. premiums have dropped to the lowest since December, Laredo, Texas-based researcher Harbor Intelligence says. Metal premiums are added to exchange benchmarks and cover a purchase of specific quality of metal in a particular location, reflecting supply and demand on the physical market, according to Macquarie Group Ltd. in London.

Incentives offered by warehouses to attract metal plunged 87 percent since July, when the LME proposed new rules to speed up deliveries, according to Harbor.

“We expect this to begin putting pressure on physical premia as consumers renegotiate terms with producers in coming months,” Defay wrote.

Aluminum for delivery in three months fell 1.4 percent to $1,808.50 a ton by 3:02 p.m. on the LME. The metal used in cars and beverage has declined 13 percent this year, the biggest drop of the six main metals on the bourse after nickel. Prices retreated from a record $3,380.15 a ton in 2008.

Lower premiums will probably lead to “much needed supply discipline,” according to the report. Production cuts will pave the way for higher aluminum prices, Defay wrote.

To contact the reporter on this story: Maria Kolesnikova in London at mkolesnikova@bloomberg.net

Aluminum Reaches Three-Week Low on Prospects for Larger Surplus

Aluminum reached a three-week low in London on prospects for a global surplus of the lightweight metal to expand. Copper slumped, narrowing the biggest monthly gain since September.

Supply of aluminum will outpace demand by 994,000 metric tons this year, above the prior 883,000-ton estimate, said Shingi Yamagiwa, manager of light-metals trading at Sumitomo Corp. (8053) Orders to withdraw aluminum from stockpiles tracked by the London Metal Exchange dropped for an eighth week in nine this week, according to daily bourse data.

“The fundamental outlook remains poor,” Stephen Briggs, an analyst at BNP Paribas SA in London, said in a report. “It is hard to see cutbacks being sufficient to significantly erode excess stocks.”

Aluminum for delivery in three months dropped 1 percent to $1,816 a ton by 10:26 a.m. on the LME and reached $1,815, the lowest since Aug. 8. Copper declined 0.2 percent to $7,138 a ton, trimming August’s gain to 3.8 percent, and the metal for delivery in December fell 0.3 percent to $3.2495 a pound on the Comex in New York.

“Copper-market participants could be taking month-end profits after the recent run-up in prices and ahead of the uncertainty from U.S. Fed asset tapering, which is still mostly expected to start in September,” Mark Pervan, an analyst at Australia & New Zealand Banking Group Ltd., said in a report.

The Bloomberg Dollar Index, a gauge against 10 currencies, touched a four-week high. A stronger dollar makes commodities priced in the currency more expensive in terms of other monies.

A copper surplus will widen over the coming year as supply expands, Macquarie Group Ltd. said in a report. LME stocks of the metal gained the most in two months to 588,000 tons this week. Withdrawal orders declined this week for all of the six main metals traded on the LME except tin, while stocks touched a record high for nickel and are the highest since 2011 for tin.

Aluminum may be poised to decline about 13 percent after prices failed to rise above a 200-day moving average, according to technical analysis by Commerzbank AG.

Tin, zinc, nickel and lead declined in London.

To contact the reporter on this story: Agnieszka Troszkiewicz in London at atroszkiewic@bloomberg.net

Chalco Narrows Loss After Halting Unprofitable Production Lines

Aluminum Corp. of China Ltd.’s first-half loss narrowed after the nation’s biggest producer of the lightweight metal halted some unprofitable production lines.

Net loss was 596.4 million yuan ($97 million) in the six months ended June 30, compared with 3.25 billion yuan a year earlier, the Beijing-based company said today in a statement, citing international accounting standards. Sales climbed 6.9 percent to 76.6 billion yuan.

Aluminum Corp., known as Chalco (2600), is on course to report a second straight year of loss this year even as the company said it will sell aluminum-fabrication assets and will transfer loans to parent Aluminum Corp. of China. Chalco in June suspended some aluminum output, affecting about 10 percent of its total capacity.

“The oversupply across main products of the company hasn’t eased,” putting pressure on prices, Chalco said in the statement. The company said it is attempting to return to profit in the second half.

Chalco slid 0.4 percent to close at HK$2.60 in Hong Kong before the earnings announcement, extending this year’s decline to 27 percent. The Hang Seng Index increased 0.1 percent today.

Aluminum prices in London dropped 12 percent this year amid an industry glut. The metal for three-month delivery was down 1 percent to $1,818.25 a ton as of 4:40 p.m. Shanghai time.

To contact Bloomberg News staff for this story: Helen Yuan in Shanghai at hyuan@bloomberg.net; Feifei Shen in Beijing at fshen11@bloomberg.net