Aluminium prices: new warehouse rules come into focus2 min read . Updated: 18 Nov 2013, 10:16 PM IST
LME's new warehousing rulesset to be implemented from 1 Aprilare designed to tackle lengthy metal delivery queues
Aluminium prices have not managed to hold on to the gains they made early on in the December quarter, and have fallen by 5.6% to $1,745 a tonne from the high seen in October. That fall, though not alarming, coincides with an uncertain time for metal prices as the London Metal Exchange (LME) is moving ahead with a proposed reform of its warehousing rules.
LME’s new warehousing rules—set to be implemented from 1 April—are designed to tackle lengthy metal delivery queues, which are blamed for high metal premiums payable by buyers. The new rules will compel warehouses with over a 50-day delivery queue to deliver a certain amount of metal determined by a formula. These changes are expected to affect aluminium in particular, where large inventories have been built up while metal premiums, too, have been rising.
Thus, although LME metal prices have declined, rising metal premiums have benefited aluminium producers. These premiums that differ by region are paid for immediately on delivery of the metal.
More metal on the market should result in softening prices and even premiums, but there are some counter views to it. One view is that LME prices will recover while premiums will decline, with little effect on producers. Another is that inventories may move out of LME warehouses to those that are not monitored. That too could have the effect of propping up prices.
A third view is that falling realizations may see more plants shut shop and lower output will see prices rise again. Though more clarity on the effect of these changes should emerge in the next few quarters, one can expect some volatility in the run-up to the implementation of the new rules.
The industry scenario is challenging as it is. Global aluminium producers have been cutting production with the twin objective of supporting prices and lowering costs at less profitable locations. Aluminium producers remain optimistic, however. UC Rusal expects China’s production to rise due to new plants, but also expects higher demand to absorb it. Excluding China, the firm is forecasting a deficit and expects this deficit to widen further between 2014 and 2016 due to improving demand and slower-than-expected capacity additions.
The long term may offer a comforting picture if you believe aluminium producers, but in the short to medium term attention is likely to be focused on the effect of changes to warehouse rules on aluminium price realizations (inclusive of metal premiums). A substantial fall can put more pressure on the financial health of the industry.