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Premiums paid to secure aluminum are poised to exceed $500 a metric ton as soon as the coming quarter on stronger demand and limited supplies, according to United Co. Rusal (486), implying a jump of at least 20 percent.

At least 75 percent of stockpiles in London Metal Exchange warehouses are tied into financing transactions and unavailable for immediate withdrawal, Deputy Chief Executive Officer Oleg Mukhamedshin said today in a telephone interview from Moscow, where the company is based. The “overall” global surcharge, added to the price on the LME, will be “well above” $500 a ton in the third quarter, he said.

Buyers in Japan, Europe and the U.S. are paying record premiums for supplies of the lightweight metal. Stockpiles tracked by the LME fell in 19 of 20 sessions as of today to the lowest since May 2013. Aluminum for delivery in three months rose 2.5 percent this year to $1,846 a ton on the LME. A $500 premium would make up about 21 percent of total buying costs.

“There is quite a deficit in the spot market,” Mukhamedshin said. Surging premiums “should be a concern for the consumers who need to hedge.”

Buyers in Japan, Asia’s largest importer, agreed to pay a record premium for this quarter at $400 a ton. Spot premiums in Europe gained 47 percent this year to $412.50 a ton, including the European Union import duty, while the U.S. surcharge jumped 61 percent to 18.9 cents a pound ($417 a ton), according to Metal Bulletin data.

‘Strong Demand’

Aluminum usage outside China will exceed production by 1.3 million to 1.4 million tons this year on “quite strong demand,” Mukhamedshin said. Producers outside the Asian nation reduced output by about 3 million tons since 2012 and should cut a further 1.6 million tons this year, he said.

The market in China, the biggest producer and consumer of the metal, should be balanced as local output falls further, according to Rusal. The nation’s producers are losing money at current prices and output is set to slow as banks cut credit to loss-making companies, Mukhamedshin said.

Financing transactions, involving a simultaneous purchase of nearby metal and forward sale, are intended to capitalize on a market in contango, when prices rise for later deliveries. Changes in borrowing costs and storage fees affect the accords’ profitability. Aluminum for immediate delivery on the LME settled today at a $22-a-ton discount to the three-month contract, the narrowest gap since December 2012, according to data compiled by Bloomberg. That compares with $45 on Jan. 2.


“The contango is OK and interest rates are still low, so financial transactions are still profitable and the stock which goes off-warrant is still not available,” Mukhamedshin said, referring to supplies held outside the LME’s network. “This is exactly why the premiums are going up, and we expect more record-high premiums in the third quarter, well above $500 per ton.”

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By Andy Home

(Reuters) - Another quarter and another record premium level for Japanese aluminium buyers.

The premium over the London Metal Exchange cash price for third-quarter shipments to Asia's largest importer seems to be settling around the $400 per tonne level, up from $365-370 in the current quarter.

A year ago the premium PREM-ALUM-JP was just $250 and until the third quarter of 2012, it had never been higher than $130.

Japanese buyers, however, have little choice but to take the premium pain.

Although still viewed as a benchmark for the whole of Asia, the Japanese quarterly premium no longer has anything to do with regional supply-demand nuances. It is now just one manifestation of a global premium structure.

If Japanese buyers baulk, producers can simply point to premiums in North America and Europe with the implicit threat of diverting shipments to those markets.


That, certainly, is the stark warning from Oleg Mukhamedshin, Deputy Chief Executive of Russian aluminium giant Rusal, speaking to reporters earlier this week.

"We think the premium can easily reach a new record high well above $500," he said, adding for extra emphasis: "In the third quarter we can see new records, even $600 would not be out of the question."

What once would have seemed a flight of producer fantasy doesn't seem quite so far-fetched these days. Those who have tried to stand in the way of rising physical premiums have been steam-rollered - witness the short-covering frenzy that sent U.S. Midwest premiums into supernova at the start of this year.

The U.S. Midwest premium, as assessed by Platts, a leading global energy, metals and petrochemicals information provider, surged to an all-time high of 20.75 cents per lb ($457.45 per tonne) in early January. The pull-back made it only as far as 18.25 cents in early April and now the premium's rising again, hitting 19 cents at the end of May.

The same is happening in Europe and the unstoppable premium machine has just struck Japan.

So just how high might premiums go? To answer that question would mean disentangling the various interconnected drivers.

That is itself a major problem since there is no clear-cut consensus as to which of them holds the key to unlocking the premium riddle, a dilemma that was laid bare in the aluminium industry's fractured response to the LME's consultation on its warehousing policy.

Is it the load-out queues at LME locations such as Detroit and Vlissingen? Is it the in-vogue stocks-financing trade that has tied up so much surplus metal and kept it away from manufacturing users? Or is it the multiplying smelter closures that are pushing the market into deficit?

All are somehow in the mix and right now there's still no easy way of saying which is the most important.


Take those infamous load-out queues, for example.

The LME's proposed solution to its queue problem has already altered warehouse company behaviour even though its load-in-load-out formula is stuck in legal limbo thanks to the courtroom fisticuffs between the exchange and Rusal.

The revolving door strategy employed by Metro in Detroit, whereby rental from the load-out queue financed incentives to attract more metal into its sheds, has been stopped. Not one tonne of aluminium has been warranted in Motown in the last two months.

The load-out queue, however, has still been growing because metal is still being cancelled and joining the queue, 180,000 tonnes of it over the course of April and May.

As of the end of April, the aluminium queue at Detroit stood at 683 days. The cost of getting metal out, a combination of the daily rental and the load-out charge, was $388 per tonne, within a whisker of Platts' then Midwest premium assessment of $406.

Until the queue actually starts shortening, the apparent linkage between the two remains intact. On current trends, the day is fast approaching since there are now only 158,525 tonnes of non-cancelled aluminium in the city.

But then there is Vlissingen, the Dutch port dominated by Pacorini, the warehousing arm of Glencore. Although inflows have slowed, they have by no means stopped and it looks like movement is being carefully calibrated to minimise queue decay in the event the LME's new policy makes it through the courts.

The aluminium queue here was 748 days at the end of April and the notional "value" was $406 per tonne. For those, and they are many, who argue that physical premiums are all about queues, there's nothing here to prove them wrong yet, although things will get a lot more interesting when the Detroit queue starts contracting.


But it should be clear by now that queues are not the only driver of premiums. After all, if less metal is flowing into the LME warehouse system and more leaving, why hasn't there been an impact on physical market availability and therefore premiums?

The answer comes in two parts.

Firstly, hardly any of that metal leaving Detroit and Vlissingen every day is going anywhere near an actual manufacturer. Rather, it is still mainly, and quite possibly totally, going to cheaper off-market storage to earn a tidy profit for stocks financiers.

The trade remains in robust good health. True, there has been a sharp contraction in the front part of the LME forward curve over the last couple of days, the benchmark cash-to-three-month period CMAL0-3 closing Wednesday valued at $22.25 contango, compared with over $40 a week ago. But we've seen these spread spasms come and go over recent years with little impact on the bigger financing picture.

And although the prospect of higher interest rates is looming larger in the United States and the UK, the European Central Bank has just moved in the opposite direction with a further loosening of monetary policy. As long as money remains cheap and interest rates low, one of the pillars of stocks-financing profitability remains firmly in place.

Then, of course, there is the fact that there is less metal around to plug the supply gap left by the financiers. As more and more smelter capacity is mothballed, this fundamental driver of higher premiums is assuming ever greater significance.

North American production was running at an annualised rate of 4.6 million tonnes in April, according to the latest figures from the International Aluminium Institute. That's the lowest level since August 2010.

Smelter capacity has been permanently lost in both western and eastern Europe over the last couple of years with many plants in the former still struggling to survive.

No-one sniggers any more when producers talk about a deficit market. What was once viewed as wishful thinking is rapidly becoming consensus.


To some extent it doesn't matter which of these drivers you think is the more important, since all three are still individually pushing premiums in the same direction.

For now at least.

At some stage it does look as if that Detroit queue is going to start contracting. And spread tightness could yet free up some of the aluminium locked up in financing deals, although the ironic net result may be to attract more metal into the LME system, where it can be snapped up again and placed back in load-out queues.

With so many moving parts, the aluminium premium machine may yet come unhinged but not in time to bail out Japanese buyers for their next quarter shipments.

And as for Rusal's claim that premiums could go higher still to $500 or "even $600" over the next few months? It still seems improbable. But it's by no means impossible. (Editing by David Evans)


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Aluminum-Sheet Use in Autos Seen Climbing Five-Fold

Global aluminum-sheet use in auto bodies will climb five-fold by 2020 as car manufacturers seek lightweight material to improve fuel economy, said Derek Prichett, a vice president of global recycling at Novelis Inc.

Sheet consumption will jump to 1.8 million metric tons from 350,000 tons currently, Prichett said in an interview in Chicago yesterday. Atlanta-based Novelis counts Ford Motor Co., Volkswagen AG’s Audi unit and the Jaguar Land Rover division of Tata Motors Ltd. as customers, according to its website.

A push in the U.S. and Europe to reduce carbon-dioxide emissions and increase mileage is prompting carmakers to seek to replace heavier materials such as steel. Ford begins production of an all-aluminum bodied F-150 pickup truck this year, and other car and truck manufacturers will follow suit, switching to aluminum over the next six years, Jack Clark, a senior vice president at Novelis, said in the same interview.

Aluminum content in light vehicles around the world, including bodies, hoods and doors, will rise to near 35 billion pounds by 2025, making the auto industry a “major” market for aluminum, Clark said.

Demand for the metal in North America will exceed production by 1.255 million metric tons in 2015, up from an estimated 1.13 million tons this year, partly because of increased shipments to the region’s auto industry, Jorge Vazquez, the managing director at researcher Harbor Aluminum Intelligence Unit LLC, said at a conference in Chicago yesterday.

Tighter Supply

The metal has risen 5.6 percent this year on the London Metal Exchange as supply tightens amid rising consumption and production cuts. The contract for delivery in three months fell 0.5 percent to $1,900.50 a ton on the LME yesterday.

Prices may near $2,000 a ton by mid-2015 after the market tips into a deficit in the second half of 2014, BNP Paribas SA said in a report May 8.

The trend in North America may spread to Japan, helping revive consumption of the metal in the transport sector, Takuki Murayama, the executive director of the Japan Aluminium Association, said in an interview in Chicago June 9.

To contact the reporter on this story: Luzi Ann Javier in New York at ljavier@bloomberg.net

To contact the editors responsible for this story: Millie Munshi at mmunshi@bloomberg.net Joe Richter


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Record offers for Q3 MJP premiums as talks continue

May 30, 2014 - 10:18 GMTLocation: Singapore

KEYWORDS: MJP , main Japanese premium , aluminium , deals , benchmark ,Rusal , Rio Tinto , Alcoa , BHP

The Japanese aluminium buyers are staring at record-high premiums of over $400 per tonne for third quarter delivery, with offers from major producers already above that level.

Three of the big four producers are offering premiums in the range of $405-410 per tonne, market participants have said. "We received $410 from Rio Tinto; from Alcoa the number is $408 and Rusal is offering $405. We have not received BHP's offer yet," a source at a large trading house in Japan said.  Second quarter Main Japan Port (MJP) premiums had settled at record-high levels of $365-369 per tonne.  Rio Tinto, which sent its offer letter on Tuesday May 27, attributed the increase to a tight market amid smelter shutdowns and high premiums in Europe...


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Novelis: Debt overshadows profit

Read more on:    Novelis | Hindalco | Acquisition | Lme | Cagr

's  of  in 2007 for around $6 billion has been one of the largest acquisitions in the industry. Hindalco, which had entered into an agreement in February 2007 for acquiring Novelis, completed the acquisition in May the same year, making the combined entity the world's largest rolled-aluminium producer. Clearly, it added significant scale and size to Hindalco's operations that were largely focussed on India.

The acquisition intended towards forward integration has since then been accruing positives despite challeng-ing business environment. Novelis has cushioned downside in earnings during the crisis as Hindalco felt the heat of downturn in the base metal (aluminium and copper) prices. Per tonne aluminium prices on the  (London Metal exchange) that were at $3,000 plus levels in FY08 have slumped to sub $2,000 a tonne levels. The price of copper, too, has been quite volatile and from more than $8,000 a tonne levels in 2008, trades at less than $7,000 a tonne levels now. In the backdrop, while on standalone basis Hindalco has seen its revenues grow at 6.63 per cent  (compounded annual growth rate) during FY08-13, the company's PBIDT (profit before interest depreciation and tax) has contracted at four per cent CAGR while profits have fallen by almost 10 per cent CAGR during the FY08-13 period. However, helped by Novelis' contribution on a consolidated level, the company has managed to see its operating profits in the positive terrain growing 3.86 per cent CAGR with profits growing 6.65 per cent FY08-13.

Moving forward, copper and aluminium prices on the LME are seen falling 3.3 per cent and 1.3 per cent CAGR between FY13-16, as per estimates of analysts at ICICI Securities. Novelis is likely to outperform Hindalco's domestic sales in terms of earnings before interest tax depreciation and amortisation (Ebitda) growth, say analysts. Novelis' Ebitda is estimated to grow by 10.4 per cent CAGR during FY13-16 compared to Hindalco's standalone Ebitda growing 6.28 per cent CAGR during the same period. Hence, the world's largest producer of rolled aluminium and a major recycler of aluminium cans Novelis will continue driving Hindalco consolidated profitability in the coming days, too. However, the high debt (taken to buy Novelis and expand Indian capacities) have played spoilsport and curtailed profit growth at the consolidated level. The debt-equity ratio at 1.6 is still high and needs to be cut to comforting levels. Positively, with developed economies seen growing, expect demand for Novelis' products to remain stable, as the company is also looking at expanding its value-added product portfolio.

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Last updated: March 27, 2014 6:06 pm

LME halts plan to cut metals queues after court ruling

A worker operates an electrolysis furnace, which produces aluminium from raw materials, at the Rusal Krasnoyarsk aluminium smelter in the Siberian city of Krasnoyarsk©Reuters

Rusal Krasnoyarsk aluminium smelter in Siberia

The London Metal Exchange has been forced put on hold a new rule to tackle the long warehouse queues that US politicians and aluminium buyers blame for increasing the price of everything from drink cans to car bodies.

Queues of more than 500 days to take delivery of aluminium from LME warehouses became the focus of a furious debate last year, triggering a series of complaints by metal users, criticism by senators and investigations by US regulators.




MillerCoors, the brewer, claimed at a Senate hearing that the logjams at LME-registered warehouses owned by Goldman Sachs, Glencore Xstrata and other companies inflated global aluminium costs by billions of dollars – allegations that were fiercely disputed.

Warehouse owners profit from long queues because they earn rent. Owners of the metal also gain, by taking advantage of the aluminium market “contango”, where prices for future delivery exceed current prices, enabling them to sell the metal forward for a small but safe profit.

In an attempt to tackle the logjam, the LME in November announced a new rule that would oblige warehouses with queues longer than 50 days to load more metal out than they bring in.

But the plans, due to take effect at the start of April, were thrown into disarray on Thursday when a UK court said the consultation procedure was “unfair and unlawful”, and set the rule aside.

The case against the LME was brought by Rusal, the world’s largest aluminium producer. The Russian company claimed that its human rights had been breached, and that the LME did not consider all the options to tackle queues.

It said that the new rule would remove support for aluminium prices, which are under pressure due to huge global stockpiles of the metal. At $1,739 a tonne for three-month delivery on the LME, the price is barely half of its pre-financial crisis peak.

Oleg Deripaska, chief executive of Rusal, said: “We welcome this decision by the High Court and look forward to working closely with the LME, and indeed all key stakeholders.”

The court’s decision caught the market by surprise. Analysts say that reform of the LME’s warehouse rules is urgent because the exchange price, used by producers and consumers to hedge and as a benchmark for contracts, had drifted so far from the price for physical delivery of aluminium because of the queues.

The LME said: “We continue to believe that Rusal’s complaint was without merit in its entirety and are currently taking legal advice with regard to our options, including appeal or re-consultation.”

Other reforms to the warehouse system, including enhanced power to tackle artificial queue formation and publication of more data, would proceed as planned, it said.

Novelis, which is the world’s biggest buyer of aluminium and supplies material for Coca-Cola cans, said it was disappointed by the postponement of the warehouse rules.

“The supply chain risk and inflated premiums that the current system allows will continue to impact the overall market and cause real business challenges for aluminium consumers,” said Nick Madden, chief supply chain officer at Novelis.

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Financial Times - April 3, 2014

2014. 4. 15. 19:46
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