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Special Report

Complete aluminiumpremiums coverage

Part of the Metal Bulletin ‘2016 Survival Kit’ series


02Special Report

Metal Bulletin Special Report | Aluminium Premiums Copyright © 2002-2015 Metal Bulletin

Complete aluminium premiums coverage:Page 3 .......... History of premiums / After the crisisPage 5 .......... Aluminium premiums by specificationPage 6 .......... FAQsPage 8 .......... Forecasts from Metal Bulletin

Editor’s choice articles:Page 9 .......... Q1 MJP aluminium premium talks begin at $120

per tonnePage 10......... US Midwest premium rises to 6-month highPage 11.......... 2016 presents a mixed picture for European

Al premiumsPage 12 ......... Al premium contracts go untraded – a victim of

the LME’s success in tackling queuesPage 16......... HOTTER ON METALS: Aluminium spreads ease as

long gives back some of its position

Copyright notice: © 2002-2015 Metal Bulletin. All rights reserved. No part of this publication (text,data or graphic) may be reproduced, stored in a data retrieval system, or transmitted,in any form whatsoever or by any means (electronic, mechanical, photocopying, recording or otherwise) without obtaining Metal Bulletin’s prior written consent. Unauthorised and/orunlicensed copying of any part of this publication is in violation of copyright law. Violators may be subject to legal proceedings and liable for substantial monetary damages for eachinfringement as well as costs and legal fees. Brief extracts may be used for the purposes of publishing commentary or review only provided that the source is acknowledged.

Contents


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History of premiums

The volatility of aluminium premiums has been by far thebiggest and most important development in thealuminium market since the global financial crisis, and hascompletely transformed the light metal’s price structure.That new structure is now being passed through the valuechain, so that companies that are many steps removedfrom the production of primary aluminium are being toldthat their supply contracts must now incorporate thealuminium premium.

But these companies have no experience with thealuminium premium. They don’t know what it is, where itcomes from, and why it’s suddenly such a huge part of thealuminium pricing dynamic.

Metal Bulletin launched its European aluminium premium in1987. The London Metal Exchange’s aluminium contract,launched in 1978, had by then become the de facto pricesetter for the whole market, and the premium had comeabout as a way to cover the logistical costs of moving metalthat were not covered in the exchange-discovered LME price.

To see the methodology that Metal Bulletin uses to assessits aluminium premiums visitwww.metalbulletin.com/methodology

For more than 20 years the Metal Bulletin aluminiumpremium served this purpose, only twice edging above the$200-per-tonne mark and generally trading around $100per tonne. Its consistency meant that when aluminiumbuyers passed it through to customers, it was incorporatedwithin a standard processing upcharge added to the LMEaluminium price, in a way which buyers of, for example,wire rod or can sheet became accustomed.

All other base metals traded on the London Metal Exchangehave such premiums as well, including copper and zinc.

After the crisis

Then the sub-prime mortgage meltdown turned into theglobal financial crisis, and everything changed. The causewas banks and investors looking for alternative, saferinvestment opportunities and finding them in the LME.Aluminium has a very robust contango (meaning forwardprices are higher than cash prices) on its forward pricecurve that the other base metals do not.

For people who bought aluminium for cash and soldforward, this contango provided a guaranteed return thatexceeded what any government bond or triple-A ratedderivative could. As the money poured into the LMEaluminium contract, the LME price became detached fromthe fundamentals of the aluminium market and began toreflect wider financial trends.

As industries and markets began to recover following thecrisis, the rising demand for aluminium was not seen inthe LME price. Instead, sellers started to push premiums asa way of reflecting that demand, and the premiumsstarted to climb. These climbs were exacerbated by analystswho were stuck in the old market and thought that thehigh premiums were only a temporary blip.

With every LME rule change or market development camethe accompanying predictions that the high premiumswould disappear. Buyers took these predictions to heartand held off buying, only to see premiums skyrocket againas they were forced to cover volumes in the short term.

The MB premium hit $300 per tonne for the first time inJanuary 2013. It went through $400 per tonne in May thefollowing year on its way to breaking $500 per tonne thatSeptember. The modest, consistent logistical cost premiumthat had accounted for perhaps 5% of the cost ofaluminium had been replaced with a volatile, demand-driven market premium that was making up about aquarter of the aluminium cost.


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Although premiums have fallen heavily in the last year,this was in response to high supply levels and not anunwinding of the abnormal premium structure thatanalysts predicted several years ago. What the LME priceand the MB premium reflect has not changed this year. TheLME price is still not the aluminium price. The LME priceplus the MB premium is the aluminium price.

Naturally, companies will look to pass this expensethrough to customers. Producers, then product producers,and now fabricators are obliged to pass on this extra cost.Premiums have already made this journey in theautomotive sector, running from aluminium producerthrough to rolling mill or casting house, to originalequipment manufacturer and eventually to carmaker.

The total cost of aluminium has not risen - it is juststructured differently. Where contracts in the paststipulated a number based on the LME aluminium price,now they must also incorporate the MB premium as anequally fundamental aspect of the final pricing terms.

Premium prices

Metal Bulletin’s price reporters track and assess a widerange of premiums for aluminium in locations across Asia,Europe and the Americas for use by its subscribers. Thesepremiums are assessed from our offices in London, NewYork, Sao Paulo, Shanghai and Shanghai, which means ourreporters are closely acquainted with the markets they arecovering.

A complete list of our global aluminium premiums, and themonthly averages that we publish ourselves, follows onthe next page.


Special Report


Aluminium premiums by specificationAsia: spot and contracts

Aluminium P1020A, cif main Japanese ports, quarterly, $/tonne Quarterly

Aluminium P1020A, cif main Japanese ports, spot, $/tonne Weekly

Aluminium P1020A, cif main Japanese ports, spot low-high, $/tonne Key price Weekly

Aluminium P1020A, in-warehouse Johor, spot, $/tonne Weekly

Aluminium P1020A, in-warehouse Johor, spot low-high, $/tonne Weekly

Aluminium P1020A, cif Shanghai, spot, $/tonne Weekly

Aluminium P1020A, cif Shanghai, spot low-high, $/tonne Weekly

Aluminium P1020A, in-warehouse Singapore, spot, $/tonne Weekly

Aluminium P1020A, in-warehouse Singapore, spot low-high, $/tonne Weekly

Aluminium P1020A, in-warehouse S Korea (Gwangyang or Busan), spot low-high, $/tonne Weekly

Aluminium P1020A, in-warehouse S Korea (Gwangyang or Busan), spot, $/tonne Weekly

Asia: monthly averages

Aluminium P1020A, cif main Japanese ports, spot monthly average, $/tonne Monthly average

Aluminium P1020A, in-warehouse Johor, spot monthly average, $/tonne Monthly average

Aluminium P1020A, in-warehouse Johor, spot low-high monthly average, $/tonne Monthly average

Aluminium P1020A, cif Shanghai, spot monthly average, $/tonne Monthly average

Aluminium P1020A, cif Shanghai, spot low-high monthly average, $/tonne Monthly average

Aluminium P1020A, in-warehouse Singapore, spot monthly average, $/tonne Monthly average

Aluminium P1020A, in-warehouse Singapore, spot low-high monthly average, $/tonne Monthly average

Europe: spot premiums

Aluminium 6063 extrusion billet, in-warehouse Rotterdam duty-paid, spot $/tonne Key price + forecast Twice �weekly

Aluminium P1020A, in-warehouse Rotterdam duty-paid, spot $/tonne Key price Twice �weekly

Aluminium P1020A, in-warehouse Rotterdam duty-paid, for delivery three months forward, $/tonne Twice-weekly

Aluminium P1020A, in-warehouse Rotterdam duty-unpaid, spot, $/tonne Daily

Aluminium P1020A, in-warehouse Rotterdam duty-unpaid, spot high-low, $/tonne Daily

Europe: monthly averages

Aluminium P1020A, in-warehouse Rotterdam duty-paid, monthly average $/tonne Monthly average

Aluminium P1020A, in-warehouse Rotterdam duty-paid, for delivery three months forward, $/tonne, monthly average Monthly average

Aluminium P1020A, in-warehouse Rotterdam duty-unpaid, $/tonne, monthly average Monthly average

Aluminium P1020A, in-warehouse Rotterdam duty-unpaid, high-low, $/tonne, monthly average Monthly average

Americas: spot premiums

Aluminium P1020A, delivered US midwest, spot, $/lb Key price + forecast Weekly

Aluminium P1020A, cif Brazilian main ports duty-unpaid, spot, $/tonne NEW! Fortnightly

Aluminium P1020A, delivered Sao Paulo region, spot, $/tonne NEW! Fortnightly

05


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What is Metal Bulletin?Metal Bulletin is an independent service that providesnews and prices for producers, consumers and traders inthe metal market, as it has done since it was established in1913. Its journalists carry out these functions from offices inLondon, New York, Singapore, Shanghai and Sao Paulo.Metal Bulletin is owned by Euromoney InstitutionalInvestor plc, one of Europe’s largest publishers of businessand financial information, which is listed on the LondonStock Exchange.

What are Metal Bulletin’saluminium premiums?Metal Bulletin assesses premiums for aluminium ingot andbillet in a range of global locations. These include in-warehouse Rotterdam duty-paid and duty-unpaid, cifmain Japanese ports, cif main Brazilian ports, cif SouthKorean ports, cif Shanghai, in-warehouse Singapore, inwarehouse Johor and delivered US Midwest. Metal Bulletinalso assesses premiums for billet on an in-warehouse basisin Europe and a cif main Brazilian ports basis.

The numbers published are Metal Bulletin’s assessment ofa representative figure for the premium over London MetalExchange cash prices based on transactions, bids, offersand appraisals gathered from buyers and sellers.

How does Metal Bulletindiscover these premiums?Metal Bulletin polls each of these markets at a definedfrequency to gather details of transactions, bids, offers andassessments for material that matches the clearspecifications that it publishes. This polling is open toanybody active in a specific market.

Metal Bulletin attempts to speak to participants from acrossthe supply chain: from producers through traders toconsumers. Based on the details that a Metal Bulletinjournalist gathers, she or he will publish an assessment ofa representative premium.

Before it is published their data and assessment isreviewed by one of their peers and then approved by asenior journalist.

But what do you actually ask people?Metal Bulletin asks for prices, volumes, delivery andpayment terms and any special circumstances that are partof a purchase or sale from the over 100 contacts that havecontributed to our global aluminium premium assessmentssince the start of 2015.

In addition, we ask companies to explain what droveparticular purchases or sales, and seek to always have aclear overview of what the driving factors are in any givenmarket on any given day.

Any pricing data collected from market sources is kept fullyconfidential and stored in secure servers within MetalBulletin’s password protected pricing database which isaccessible only to the authorised editorial staff.

FAQs


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Can I or my companycontribute to the premiums?So long as you are active in the market we would welcomeyour involvement. Contact editor Alex Harrison,[email protected], in the first instance.

How can I know the premiumsare representative?Metal Bulletin publishes a log of some or all of the tradesthat it gathers to enable users to see the details of businesson which the key premium assessments are based. Inaddition, Metal Bulletin reserves the right to question andexclude numbers that appear to be outliers. It may alsorequire verification of certain deals in the form of contracts,emails or confirmation from a counterparty.

Metal Bulletin’s pricing reporters abide by a code of conductand there is a clear procedure in place for the correction ofprices and for complaints about particular prices.

How does Metal Bulletin ensurebest practices and integrity ofits pricing?Metal Bulletin pricing procedures align with the IOSCOstandards for Price Reporting Agencies. Adopting the bestpractices promoted by IOSCO, Metal Bulletin has launched anew state-of-the-art pricing database system whichensure that full audit trails, adequate record reeking (fullconfidentiality of input data is maintained), and seniorstaff oversight of the pricing process are observed any ateach pricing session.

How do companies usepremiums in their businesses?The prices and premiums that Metal Bulletin publishes areused in a wide variety of ways. Companies that areconsidering entering the spot market to buy or sell use thenumbers that Metal Bulletin produces as a guide fornegotiation, for example.

Senior managers also use the prices internally as anindependent guide to the performance of their sales orpurchasing teams.

Banks and insurers base the valuations that they carry outfor a variety of purposes on prices published by MetalBulletin as well.

The prices and premiums are used as the basis for thesettlement of term contracts between counterpartieslooking for an independent arbiter of price levels in thespot market over a certain period of time.

The prices are also required by those that buy materialwhose input costs are derived from a formula linked to thenumbers published in Metal Bulletin, to verify the chargesmade by their own suppliers.

How do I get hold of the premiums?The weekly newsletter of all the aluminium premiums thatMetal Bulletin assesses across the globe is published everyMonday morning.

Existing Metal Bulletin subscribers can also receive thealuminium premiums newsletter, free of charge, byaltering their account preferences here. Simply go to‘Closing Prices and Premiums’ and tick ‘Weekly Premiums –Aluminium’.

https://www.metalbulletin.com/Email-settings.html


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What’s the forecast foraluminium premiums?As the aluminium premium is now considered to be afundamental part of the final pricing of aluminium, theimportance of analysing premiums has risen.

It is now crucial to understand what affects thesepremiums, both currently and in the future. Metal BulletinResearch (MBR) provides market analysis and forecasts foraluminium premiums. Not only does it forecast whatpremiums will be in the quarter to come, it also providestransparency to these forecasts with explanations of themarket forces driving the premium.

What market forces arerelevant now to the futurelevel of aluminium premiums?In general, MBR believes there are a series of factors thatwill affect the direction for premiums. The underlyingsupply/demand balance will have the most direct impacton premium direction, but also any change in the interestrate and shift in the shape of the aluminium forwardcurve, as these factors can affect the financing deals’profitability, which can further weigh on aluminiumpremiums. Chinese exports can take their toll on the ex-China supply/demand balance which further affectpremiums – metal availability will increase if lower-costChinese producers continue to export as they find itdifficult to sell into the oversupplied domestic market.

How does Metal BulletinResearch forecast aluminiumpremiums?Rather than just presenting a forecast premium price, MBRlays out the analysis behind the forecast.

Each issue of MBR Aluminium Weekly Market Trackerfeatures a premium forecast table, with the analysts’opinions on the outlook for both premium direction andabsolute levels over the next quarter. Bullish factors andbearish factors that affect premiums are listed, withsuggestions on these factors and their relative strength toeach other in order to make our premium forecastjudgments. We also include a premium forecast chartwhich shows historical premium/LME price information andquarterly forecasts for the next year.

To find out more contact [email protected] call +44 (0) 20 7779 8710

Forecasts from Metal Bulletin


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A major aluminium smelter has offered Japanesetraders and end-users a premium of $120 per tonnefor the first quarter of 2016, according to sources.

This would indicate a 33% jump from a premium of $90per tonne for the fourth quarter this year but a 72% slumpin premium from first quarter 2015 of $425 per tonne.

Market participants are expecting the first-quarter 2016 MJPpremium to be settled at a lower level than the offerednumber by the major producer.

“Our previous expectation was that the Q1 premium wouldbe settled at $85 per tonne, but we are now expecting tosee $90-95. After all, premiums are on a rise in Europe,while inventory has been decreasing in Japan,” a marketsource involved in the negotiations said.

“Smelters all tended to provide high offers at the verybeginning, but the final range still depends on how mainJapanese clients bargain,” a major Japanese trader said.

For the fourth quarter, major aluminium producers startedby offering Japanese customers premiums of $100-110 pertonne, and ended up settling at $90 per tonne.

“We have heard the offer of $120, which is higher thanexpected. We think the premium is likely to get settledbetween $100-120 per tonne,” another major Japanesetrader said.

A third Japanese trader shared the same view, saying “theoffer is a bit too high.”

The Asian quarterly benchmark talks are still ongoing andmarket participants said they are expecting the first quarterpremium to be settled in early December

Linda [email protected]: Shanghai

This article was first published in December 1, 2015

Editor's choice articles onAluminium Premiums:Q1 MJP aluminium premiumtalks begin at $120 per tonne


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The Midwest aluminium premium has yielded anotherbump following the Thanksgiving break, reaching itshighest level in more than six months.

Metal Bulletin sister title AMM’s assessment of the spotP1020 premium rose to 8.75 to 9 cents per lb from 8.5 to8.75 cents per lb previously. The premium last topped thislevel on May 27, when it was at 9.75 to 10 cents per lb.

The premium has seen steady increases from this year’slow of 6.75 to 7.25 cents per lb at the end of September,driven largely by supply concerns sparked by smeltercurtailments by Alcoa Inc. and Century Aluminum Co.

However, suppliers believe that increases in the premium willbegin to taper as 2015 draws to a close, they said this week.

“I don’t think it’s going anywhere, even with thisreduction of capacity. If we lose a lot of production here, itmight go up a penny or two,” one supplier source said.

“I think people are waiting for [London Metal Exchange]prices to drop a little more, nobody is in a hurry to buy,” asecond supplier said. “I think that’s human nature: whenprices have gone down in the past, people think it’s goingto continue.”

Aluminium prices on the LME have generally continued tolanguish below $1,500 per tonne since finding a new six-year low in late November. The LME’s three-monthaluminium contract closed the official session at $1,469 pertonne (66.6 cents per lb) on December 3.

Even with the slight uptick in the premium, business has beensomewhat sluggish, the second supplier said, a trend that willcontribute to the premium levelling off. “I can use a littlemore business,” he said. “I think the volumes are not great; Idon’t think there will be much change [to the premium].”

This report was first published by American Metal [email protected]: New York


US Midwest premium rises to 6-month high


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European aluminium premiums are stable and likelyto remain that way into the first quarter of 2016, butthere are mixed views as to their fate beyond that.

Metal Bulletin’s European duty-unpaid aluminiumpremium stands at $105-125 per tonne, while the duty-paid number is $155-180. The midpoints of both premiumranges are well supported this week, though spot businessis slowing ahead of the end of the year.

Market participants expect premiums to remain at currentlevels or even poke up a little into the first quarter, andconsumers are now booking first-quarter supply deals withfixed-rate premiums. European premiums have been risingover the past two months on nearby tightness, and that isexpected to carry into about the middle of the first quarterof next year.

Beyond that, however, there is no consensus as to wherethe premiums will go. Until recently, most marketparticipants would have said that premiums will fall, asthe global oversupply will eventually tell in Europe. Mostsupply deals for 2016 beyond the first quarter havefloating-rate premiums as consumers forecast lowerpremiums ahead.

But now that is being challenged, with some marketparticipants expecting Europe’s tightness to continuebeyond the first quarter. Some traders have reportedrequests this week for fixed-rate premiums on 2016 dealsbeyond the first quarter.

“I’ve never seen so many mixed views for 2016 – it’s halfbearish and half bullish,” a trader said. “Some peoplethink China will export a lot next year, and some thinkChina won’t export because LME prices are too low.”

If the tightness in Europe does continue beyond the firstquarter, premiums could rise as volumes are expected tobe strong in 2016, particularly in the automotive space.

“Autos are driving the good news in primary foundry alloys– we expect a 5-7% increase in automotive castingsdemand,” a producer said.

But weak spreads in the first quarter could encouragemetal holders to exit positions, putting their material ontothe market and depressing nearby premiums.

“Why would you hold stocks when the spreads are sobad?” a second trader said.

LME aluminium spreads are notoriously volatile, however,and could become more favourable to financing activity ina very short time.

Jethro Wookey [email protected] Twitter: @jethrowookeyLocation: London


2016 presents a mixed picturefor European Al premiums


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The London Metal Exchange’s new aluminium premiumcontracts remain untraded two weeks on from launch,but the lack of interest in the contracts is a testamentto the belated success of the LME’s warehouse reforms,Metal Bulletin’s Mark Burton argues.

When, in April last year, the LME first looked at launchingcontracts that would allow the physical market to hedgealuminium premiums, it recognised that if its warehousereforms went to plan, the market might not have muchneed for premium contracts.

In its ideal world, the LME would be successful in its effortsto reduce queues in the LME warehouse system, and theindustry’s need for a hedge against the highly inflatedpremiums seen at the peak of the warehousing crisiswould be greatly diminished, because if the queues didnot exist, neither would the exorbitant premiums.

But, in 2014, with a lawsuit brought by Rusal (in December2013) about its proposed reforms hanging over the LME, theexchange could not say with certainty when it wouldachieve its goals, and as a result, it viewed premiumcontracts as a useful interim solution.

“Given the likely timescale for queues to diminish at LMEwarehouses [including the potential for legal delays] apremium hedging contract may be of assistance to themarket in respect of queue-based premiums until such timeas queues have been managed down by LME rule-making,”the exchange said in a notice to members at the time.

The LME also figured that, beyond that point, the contractscould prove useful as a hedging tool in a post-queue,low-premium environment, and so it pushed ahead withthe development of the contracts.

But two weeks on from their launch in November 2015,the lack of activity in the premium contracts suggests thatthey could prove to be a resounding failure, preciselybecause the LME’s rule-making, belated and delayedthough it has been, is proving to be a resounding success.

Some brokers have received enquiries about the contracts,primarily from physical traders, but so far none of the fourregional contracts has traded since launch on November 23,and were it not for the price discovery services provided byLME floor traders, the quoted prices for some of thecontracts would be embarrassing for the exchange.

For example, an order placed on Select on December 2established a $5/400 bid-ask spread in the Europeanpremium contract, which was quoted at $120 at the time.Five days on, no one outside of the LME Ring has made abetter market.

Even on the floor, the $110/140 bid-ask spread on theWestern Europe premium is indicative of the lack of depthin the market, despite incentives including an introductorytrading fee waiver and market-making rebates.

Things may change, but after a fortnight’s existence, itappears that the contracts are attracting little interestbecause, fundamentally, they are designed to provide asolution to a problem that no longer exists.

Al premium contracts go untraded– a victim of the LME’s success intackling queues


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Contracts born of circumstanceThe LME began looking at launching premium contracts tooffer a hedge against then-record-high premiums in Aprillast year, shortly after the UK courts forced it to launch anew consultation on its warehouse reforms, therebydelaying their imminent introduction.

Consumers had asked for the contracts because of agrowing unhedgeable basis risk between the LME flat priceand the all-in cost of buying aluminium, and in themonths leading up to the end of last year, their needs onlygrew, as premiums rocketed and the unhedgeable portionof the all-in aluminium price rose to nearly 25%.

However, in December 2014, the UK Supreme Court threwout Rusal’s claim for an appeal against an earlier rulingthat had found in favour of the LME, thereby ending theyear-long suit and enabling the LME to introduce itsbroader suite of tools to tackle the warehouse queues.

The fall in premiums that followed was as precipitous adrop as one is likely to see in the metals markets: in lessthan four months, the MB duty-unpaid Rotterdamaluminium premium had declined from more than $400per tonne to less than $100, and the unhedgeable portionof aluminium buyers’ purchasing costs had dropped toabout 5%, as the chart below illustrates.


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By making it impossible for warehouses to build newqueues of more than 50 days, and forcing warehouseswith existing queues to load out more units than they loadin, the LME transformed the ability and willingness ofwarehouse companies to offer large incentives to fill uptheir sheds.

As a result, the warehouse bid previously available inlocations such as Detroit and Vlissingen collapsed, andpremiums followed suit. So too did the length of thequeues in those locations, as the LME’s monthly warehousequeue data shows.

At the end of October, the queue to withdraw aluminiumfrom Pacorini sheds in Vlissingen had shrunk to 311 days,down from 683 days in April last year, while the backlogin Metro’s Detroit warehouses had fallen from 683 days to236 days.

And with the planned introduction of queue-based rentcapping and increased load-out rates next year, the LMEhas engineered further incentives for those warehousingcompanies to get on the right side of the 50-day queuelimit sooner rather than later.

The legacy queues at Detroit and Vlissingen will persist for alittle while longer, but their sting has now been well andtruly drawn by the LME’s twelve-item package ofwarehouse reforms.

Already, and perhaps most crucially for the LME’sreputation, LME prices and all-in prices have started toconverge, and market participants are behaving as theexchange imagined they would in the post-queueenvironment they were imagining back in April last yearwhen they started looking seriously at launching thepremium contracts.

Proof of the fact that the LME is finally putting the issue tobed can be seen in the collapse in premiums and queuelengths. Over the past two weeks, it has also been plainto see in the moribund trading activity in the newpremium contracts.

Of course, the LME may be right: the industry may find ituseful to be able to hedge aluminium premiums in a post-queue environment.

As the chart above illustrates, the percentage of thepremium relative to the all-in price has risen again overthe past few months as premiums have rebounded onregional supply tightness, and, if the trend continues,consumers and traders may well look to the LME to hedgeagainst it.

Some contracts can be slow to gain traction, but evenwithout the usual liquidity problems associated with newproducts, there are also a number of peculiar obstacleson the contracts’ launch runways that may end upkeeping them on the ground, broker and trade sourcestold Metal Bulletin.

Contractual quirks First, the fact that there are four regional contracts willexacerbate issues with trading liquidity and heighten concernsabout low levels of open interest, some brokers said.

Second, while the contracts are regional, they still do notoffer a precise hedging solution for consumers in the fourmarkets they cover.

In Western Europe, for example, the regional premiumcovers LME warehouses in Belgium, the Netherlands andGermany, but not those in the UK or Italy.

As a result, the contracts may not precisely cover the costsof purchasing for consumers in countries in northern orsouthern Europe that may be considering using thecontracts for hedging purposes.

And for market participants looking to settle thecontracts physically by delivering to or withdrawing fromthe LME’s warehouses, the contracts may also provefrustratingly imprecise.

For example, a consumer who buys the Western Europecontract with the hope of picking up aluminium inAntwerp may end up obtaining a warrant for metal inHamburg, 550km away from the desired location.

Consumers would also have no visibility over which brandor form of aluminium they would receive, which couldfurther reduce the attractiveness of the LME’s new contractas a means of facilitating the physical production,consumption and trading of aluminium.


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However, this may prove to be a blessing in disguise, asthe imprecision in physical settlement outlined abovecould help to forestall a third problem that may otherwisethreaten the contracts’ chances of success.

That problem is that, in theory, the contracts threaten todisintermediate certain brokers who are already trading inthe over-the-counter warrant market by bringing thetrade in warrants on to the exchange.

The concentration of stock in Detroit and Vlissingen thatoccurred as aluminium and other metals gravitatedtowards the back of the queues in those locations did greatdamage to the OTC warrant trade, by making it more costlyand less rewarding to sift for the greatly reduced numberof valuable warrants available in clearing.

As the queues dissipate, the geographical concentration ofstock should become less severe as well, and warranttraders will welcome the prospect of a newly liquid andregionalised trade in LME warrants. It is difficult to see whythey would want their clients to start trading thosewarrants directly on Select, rather than via the broker-mediated phone market.

Thankfully for those brokers, the uncertainty surroundingbrands and warehouse locations inherent in the premiumcontracts’ settlement procedure may help to ensure thattraders looking to pick up aluminium warrants continue todo so via the well-established OTC channels.

High marginsAs a fourth and final obstacle, there is also the fact that ifan LME client wants to trade the premium contracts, theyneed to post initial margins equal to as much as 95% ofthe underlying value of the contract.

Initial margins for the Southeast Asian premium contract,for example, are $86 per tonne, compared with a contractvalue of $90 per tonne.

High margining requirements may not cause majorproblems, given the professional and well capitalisednature of the industry the contracts serve, but brokerscontacted by Metal Bulletin have nevertheless beenscratching their heads about why they are so high, andstruggling to justify the margins to their clients, who areused to posting initial margins equal to about 10% of thevalue of the underlying contract.

The reason that they are so high is that in setting themargin requirements for the contracts, the LME had to factorin the colossal rise in premiums that the queues in itswarehouse caused, and the vertiginous drop in premiumsthat followed its package of reforms to tackle the problem,as a source familiar with the contracts told Metal Bulletin.

The margins, in short, assume that the egregious volatilityin aluminium premiums caused by the queues couldhappen again, and do not take into account the fact thatthe LME’s rule making has made a repeat of thewarehousing crisis virtually impossible.

This final quirk will not sink the contracts, but the highmargin requirements do serve as a symbolic reminder thatthe premiums contracts were primarily designed to fix amajor aberration in the structure of aluminium pricingthat, thankfully for the LME’s reputation and the wideraluminium market, no longer exists.

Mark Burton [email protected] Twitter: @mburtonmb Location: London



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It has been an interesting week for the aluminium market,with financing banks getting tougher and a major long-position holder giving back some of its position.

Both situations have fuelled several theories, leaving ablurred picture of what is going on.

One common factor, however, is the role that regulatoryoversight is playing in commodities markets.

For starters, several financing banks have told their clientsthat they are comfortable financing only warrants storedofficially on the London Metal Exchange.

While this is not an entirely new phenomenon – on-warrant material is insured and easier to trade – themore-cautious approach being adopted by financingbanks comes at the same time as their compliancedepartments step up scrutiny of their counterparties.

It’s hardly a surprise, given the number of largecommodities merchants, traders and banks that have beenroiled by internal trouble or reorganisation in the pastseveral months.

Add to the mix the sharp decline in aluminium premiumssince the start of the year and the losses being registeredby market participants, and it’s no wonder that theappetite for financing is declining.

With some financing banks offering funding only ifmaterial goes on-warrant, about 70,000 tonnes ofaluminium has been moved on-warrant in Rotterdam intwo tranches so far this week, market participants say.

It isn’t a move common to all financing banks; there arestill places to secure finance for off-warrant metal. The other major development this week has been themove by the long, a major bank player, to give up some ofits January 2016 position.

Market participants say the long has been letting materialgo at valuation without a fight, with one short-positionholder in particular benefiting.

Contrary to the current trend, this bank is unlikely to becoming out of the LME business. But senior managementalways have an eye on their peers, and are likely to havetaken note of the closure this week of Morgan Stanley’sLME trading desk.

There has been speculation for some time that the longhas been facing scrutiny from a combination of the LMEand UK regulator the Financial Conduct Authority, as wellas its own compliance department, as a result of itsaluminium exposure.

Equally, the long-position holder might just have decidedto trim its position ahead of the year-end and book theprofit in its P&L.

Andrea Hotter [email protected] Twitter: @andreahotterLocation: New York


HOTTER ON METALS: Aluminiumspreads ease as long gives backsome of its position

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