BackAluminium premiums begin losing sheen
One factor putting pressure on premiums is revised LME rules that are designed to speed up delivery times from warehouses stocking metal
Premium(Bloomberg)
The spot price of aluminium has declined by 4% since the start of 2015 on the London Metal Exchange (LME). That does not seem a big deal, as copper prices have fallen by 9%. But the real worry for aluminium is cracks showing up in metal premiums. Earlier, falling metal prices were more than compensated for by rising premiums, paid by buyers for immediate delivery of the metal.
Last week, Alcoa Inc. said that it might sell or shut down 14% of its aluminium capacity and 16% of its alumina capacity in the next 12 months. The move suggests a pre-emptive action against a further fall in prices from their current levels.
The importance of premiums can be seen from how they have moved versus how spot prices have moved. Between the March 2012 quarter and the December 2014 quarter, average LME spot prices have declined by 9.8%. At present, it is ruling at $1,733 a tonne. But metal premiums in Europe have risen by 140% to $490 a tonne and in Japan by 117% to $420 a tonne. The proportion of premium to the total price has risen significantly.
But premiums seem to be coming under pressure. Reuters reported that a Japanese buyer has secured a lower premium of $380 a tonne, marking the first fall in six quarters. Premiums are falling elsewhere too, and a Financial Times report states that the combined European price of aluminium has declined from around $2,600 a tonne in November to $2165 a tonne.
The reasons cited for the declines are several. One factor putting pressure on premiums is revised LME rules that are designed to speed up delivery times from warehouses stocking the metal. Another is an exit from financial deals involving aluminium. Slack demand conditions are another concern. China’s exports of aluminium, as its own demand suffers because of slower economic growth, could be another factor.
If the fall in the total price of aluminium continues in this fashion, then aluminium producers will feel the heat. That may trigger another round of production cuts across the globe to stabilize prices.
Falling realizations globally are a negative for Indian producers, who have been exporting the metal to compensate for weak domestic demand. In April-November, Indian exports of aluminium rose by 72%, according to CRU Group, a market analysis and research provider. That source of income may yield less income and profits in the coming quarters, if the downtrend continues. Some indication of what to expect should emerge in April, when Alcoa reports its March quarter numbers.
The writer doesn’t own shares in the above-mentioned companies.
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