Aluminum Costs Seen Dropping as LME Unclogs Depots; The rise in physical premiums contrasts with slumping futures

Aluminum Costs Seen Dropping as LME Unclogs Depots: Commodities

The London Metal Exchange’s plan to ease congestion at warehouses storing near-record amounts of aluminum will accelerate deliveries and reduce premiums paid for supply, at a time when prices are already near a four-year low. Waiting times lengthened to a year or more in some locations, driving premiums added to the LME price to a record. Delays at depots spurred at least 16 lawsuits filed in U.S. courts as well as scrutiny from lawmakers and regulators. The surcharges, which rose almost 15-fold since 2008, are now retreating as traders anticipate the changes, which are scheduled to be reviewed by the LME’s board this month.European premiums excluding duty will drop as much as 15 percent to $145 a metric ton by the end of the June, the lowest since 2012, according to the median of estimates from 10 consumers, traders, producers and analysts surveyed by Bloomberg News. Rising premiums boosted returns for smelters enduring prices that at the Oct. 4 close of $1,844 a ton are now 45 percent below the record set in 2008. Plants on average need $1,900 to break even, according to Wood Mackenzie Ltd., an Edinburgh-based research company.

“We will see erosion of both physical premiums and the price,” said Ronan Donohoe, the global head of metals and bulk commodities trading at Deutsche Bank AG in London. “It needs to occur to purge the high-cost production. This will mean some short-term pain but it needs to be done.”

Second Quarter

The rise in physical premiums contrasts with slumping futures. The LME’s benchmark three-month contract fell 11 percent this year and will average $1,900 in the second quarter, when the new LME rules may start, the median of 13 analyst estimates compiled by Bloomberg shows. Prices reached a four-year low of $1,758 in June.

This year’s decline in aluminum compares with a 1.4 percent drop in the Standard & Poor’s GSCI gauge of 24 commodities and a 13 percent gain in the MSCI All-Country World Index of equities. The Bloomberg U.S. Treasury Bond Index lost 2.5 percent.

Supply is outpacing demand for a seventh consecutive year and will keep doing so until at least 2018, Morgan Stanley estimates. This year’s projected surplus of 1.69 million tons is almost equal to what Japan consumes in a year. While stockpiles in warehouses monitored by the LME reached a record 5.49 million tons in July and now stand at 5.36 million tons, Wood Mackenzie says global inventories are about 14 million tons.

Nearby Delivery

Not all the metal is available to consumers, with Societe Generale SA estimating that as much as 80 percent of the LME stockpiles are tied into financial transactions. That typically involves buying metal for nearby delivery while making a forward sale to capitalize on a market in contango, where prices rise into the future. Combined with the rising premiums, the stockpiling has helped shore up returns for producers.

Financing is at its most profitable in at least 4 1/2 years, according to Macquarie Group Ltd. Aluminum for December delivery traded at a discount of $130.50 to the December 2014 contract on Oct. 2, the widest since at least February 2009.

The LME is proposing to oblige warehouses where withdrawals take more than 100 days to deliver out more metal than they take in. The plans may already be altering the flow of metal to depots, with average daily arrivals dropping to 5,849 tons last month, from about 19,000 tons a year ago.

The consultation period for the changes ended Sept. 30, just before the start of LME Week today. The annual event attracts thousands of miners, refiners and traders for talks on metals markets and supply contracts. This will be the first one since Hong Kong Exchanges and Clearing Ltd. (388) bought the bourse for $2.2 billion in December. The board may not make a final decision about its warehouse plan at the next meeting, Miriam Heywood, a spokeswoman for the LME, said last week.

‘Unprecedented Intervention’

United Co. Rusal (486), the world’s biggest producer, said last month that the LME should postpone the changes because it would further distort the market. The “unprecedented intervention” will accelerate the delivery of another 2 million tons onto the market, Chief Executive Officer Oleg Deripaska said in a statement Sept. 25. Alcoa Inc., the largest U.S. aluminum maker, said it would harm producers without helping consumers.

The Midwest surcharge, the U.S. benchmark, will drop 22 percent to 8 cents a pound by the end of June, the Bloomberg survey showed.

Even with the projected decline, premiums will still be about 23 percent higher than the 10-year average, according to data compiled by Bloomberg. Alcoa (AA), based in New York, will report a 7.7 percent increase in the most widely forecast measure of profit to $282.08 million this year, the mean of 12 analyst estimates shows. Shares of the company fell 8.3 percent to $7.96 since the start of January and will reach $8.33 in 12 months, based on the average of 15 forecasts.

Warehouse Congestion

Rusal, based in Moscow, will report profit of $190.5 million, from a $55 million loss in 2012, the mean of seven estimates shows. Its shares slumped 51 percent to HK$2.39 this year and will rebound to HK$3.16 in 12 months, according to the average of 14 predictions.

The LME’s plan won’t be enough to alleviate the warehouse congestion that is increasing costs for consumers, a group which includes the Washington-based Beer Institute and American Beverage Association, said in a letter last month.

Global costs were inflated by $3 billion in the past year by the “unfair” rules governing deliveries by depots, Tim Weiner, a global risk manager at Chicago-based MillerCoors LLC., said in written testimony before his appearance July 23 at a Senate hearing. Warehouses are owned by companies including Goldman Sachs Group Inc., JPMorgan Chase & Co., Glencore Xstrata Plc and Trafigura Beheer BV.

Capacity Cuts

Global economic growth that the International Monetary Fund says will accelerate to 3.8 percent in 2014, from 3.1 percent this year, still won’t be enough to erase the glut. Supply will exceed demand by 350,000 tons next year, Deutsche Bank said in a Sept. 25 report. Producers already announced capacity cuts of 1.4 million tons through the middle of next year and may add another 500,000 tons to that by the end of it, according to the bank.

The cuts may be offset by rising output in China, which makes almost half of the world’s aluminum. Output there will expand 7.9 percent next year and 8.1 percent in 2015, Deutsche Bank estimates.

State Subsidies

Curbs may be partly delayed because of government intervention to preserve jobs, according to the London-based International Aluminium Institute, which represents producers. At least 960,000 tons of unprofitable capacity from New Zealand to Bosnia is supported by state subsidies, Deutsche Bank says.

“The high level of premium perpetuated by the queues has been keeping a lot of smelters in business which shouldn’t have been there,” said Colin Hamilton, the head of commodities research at Macquarie in London. “The market has to rebalance and it can only be balanced by shutting off capacity and you need the prices to go down to shut off that capacity.”

To contact the reporters on this story: Agnieszka Troszkiewicz in London at; Maria Kolesnikova in London at

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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