LONDON - Aluminum premiums, or costs to get metal out of storage, have soared to all-time highs in the United States with Europe and Asia close behind as smelters shut and spare metal is snatched up by traders for collateral in financing deals.
The rise in premiums highlights the London Metal Exchange's (LME) limited ability to cool a market where low interest rates continue to whet appetites for locking up aluminum as a form of investment.
The LME, the world's largest metals marketplace, announced big changes to its metals storage system in November after years of complaints about wait times of more than a year and large premiums to withdraw metal from the warehouses it monitors.
It outlined plans to slash waiting times to a maximum of 50 days, among other measures, which analysts and manufacturers had hoped would lead to lower premiums especially given that the aluminum market is oversupplied.
But the benchmark Platts U.S. Midwest aluminum premium jumped by three U.S. cents per pound to 15 U.S. cents per pound of metal over the LME cash price late last week, the pricing agency said.
"The fact that we are still trading at 15 cents today suggests that this was not a fluke and that we will likely stay at elevated levels for some time across all geographies," INTL FCStone analyst Ed Meir said.
U.S. producer Ormet Corp <ORMTQ.PK> said last October it would close its 270,000 tonne per year aluminum smelter in Hannibal, Ohio, casualty of historically low prices and high power costs.
Low prices and high energy costs have pushed Western producers to slash capacity, with smelter closures gathering pace in recent months.
"We're hearing that metal is quite tight, we're hearing that possibly the closure of Ormet has something to do with it," he added.
Dutch smelter Aluminium Delfzijl, which produces more than 110,000 tonnes of new aluminium a year, said it had filed for bankruptcy on December 30.
Harbor Intelligence research institute believes that North American producers are virtually sold out of metal for January and anticipates record-high premiums for Europe, the Asian region, Mexico and Brazil over the next few weeks.
Analysts believe most of an estimated 10-15 million tonnes of global aluminium stocks are locked up in financing deals.
This involves an investor borrowing money at low rates to buy physical metal, striking a warehouse deal to store it cheaply and taking advantage of the market's existing futures price structure to sell it forward immediately at a profit.
"The Chinese keep cranking out more and more metal and they are more than offsetting whatever (production) we are losing in the West, so prices continue to come down," Meir said. "More metal is being produced but it's not ending up in the market, it's going into these financial trades so the market is tight."
Benchmark aluminium prices on the London Metal Exchange (LME) for delivery in three months are around $1,775 per tonne, below the cost of production for a large portion of the global smelting capacity.
"It's not clear if the premium spike is sustainable," Standard Bank analyst Leon Westgate wrote in a note to clients.
"But it does appear to reflect concerns amongst traders in terms of being able to replace aluminium units in an environment that includes weaker U.S. production, reduced Canadian imports and a lack of LME material flowing out to the wider market."