LONDON: Aluminium supply contracts for consumers in Europe are likely to almost double next year as spot market premiums the cost to get metal immediately rise to record highs on rising demand and supply cutbacks.
Premiums, paid over the London Metal Exchange (LME) cash prices, have lurched higher in September to fresh record highs of $460-480 a tonne for duty-paid material in Rotterdam, from $450-460 last month.
Premiums have risen more than 60 percent since the beginning of the year, due to a combination of rising demand and some supply cutbacks from Western producers.
Traders said uncertainty about the outlook for premiums is likely to prompt consumers to push for quarterly contracts with producers rather than locking-in annual supply deals.
"We're expecting that customers will have to pay close to current premium levels. If you compare it to last year, you could still do deals at around half the cost," a physical aluminium trader said.
"A lot of people think premiums are at their peak and you won't want to fix at those levels for a year," he said.
Last year, premiums were agreed at around $250-280 a tonne, with consumers favouring shorter-term deals due to uncertainty about the outlook for premiums.
Yearly negotiations are set to begin in late October during LME Week, an annual gathering in London of the global mining community, but traders said contracts are unlikely to be concluded until at least November.
Supporting the outlook for premiums in Europe, some fourth quarter premiums in Japan were agreed at record highs of $420, and in the US Midwest premiums are also trading at record highs of 21 cents/lb.
The LME last week announced a slight delay to the launch of its aluminium premium contract to the second quarter of next year.
The exchange hopes the contract will appeal to investors wanting to lock in future premiums, which have been partly inflated by backlogs at LME-registered warehouses.
TIGHTENING:
After years of chronic oversupply, the aluminium market is beginning to tighten as Western producers cut production to battle rising costs, Indonesia bans bauxite ore exports and demand for aluminium rises, particularly from US auto makers.
A Reuters poll in July showed analysts expect the aluminium market to slip into a 444,000 tonne deficit in 2015, its first deficit in nine years.
Overproduction in China and historically high inventories in LME-registered warehouses, however, will put a cap on further price rises, traders said.
Estimates of aluminium inventory outside China are at around 12 million tonnes. In LME-registered warehouses alone, stocks amount to nearly 5 million tonnes, although they have fallen by around 10 percent since the beginning of the year.
"A lot of aluminium is going out of LME warehouses but it's not going to the market as they are going into cheaper and unregulated warehouses," a second aluminium trader said.
LME warehouse owners increase revenues by concentrating metal in individual locations, where consumers can face queues of up to a year and a half to get hold of it and the aluminium incurs rental charges during the wait.
In addition, vast amounts of metal is locked in financing deals, which involve investors borrowing money at low rates to buy physical aluminium, striking a warehouse deal to store it cheaply and taking advantage of the market's contango structure to sell it forward immediately at a profit.
The aluminium cash contract is trading at a $36.75 discount to three-month prices, compared with a $3.25 premium in late August, which was its highest premium since December 2012.
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