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.”
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 1.7 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.
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. 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.
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