Saturday, 23 March 2019 09:14 GMT

Aluminium premium bubble over? Just don't tell LME

(MENAFN - Gulf Times) So is the aluminium premium bubble well and truly over? It certainly feels that way. Japanese buyers have just secured a premium of $90 per tonne over London Metal Exchange (LME) cash metal for their fourth-quarter shipments.
As recently as the first quarter of this year, Japanese premiums were at a record high of $425 per tonne.
Moreover, these Q4 2015 premiums are the lowest since the third quarter of 2009, marking a return to historical norms.
The scale of the collapse in Japanese premiums is partly down to specific local drivers but even that statement reflects a return to normality, where physical premiums don't move in global lock-step but rather mirror regional supply-demand dynamics.
US and European premiums are higher at around $155 and $120 per tonne respectively but have fallen a long, long way since the start of this year.
Good news for the LME itself, which has faced fierce criticism for its warehousing policies, perceived by many users as the root cause of the aluminium premium bubble.
Its increasingly aggressive reforms of its loading-out procedures have undoubtedly played a part in bursting the premium bubble, although market forces have arguably played an equal if not larger part.
The exchange is still working on even more radical solutions to its load-out queues. Is it becoming over-obsessed with a problem that has now to all intents and purposes been fixed?
Japanese aluminium buyers took heavy collateral damage from the premium bubble. There were, remember, no LME load-out queues for aluminium in the Asian region. The US had Detroit and Europe had Vlissingen. Queues at both LME delivery locations were core but not exclusive drivers of the premium machine of 2012-2014.
But aluminium is a global market and producers could argue that if Japanese premiums didn't rise to match those elsewhere, the metal would simply be diverted into the higher-premium regions.
Now Japan seems to be at the forefront of falling premiums, largely because it is located so close to China's overspill pipe.
The Chinese domestic market is chronically oversupplied and exports of semi-manufactured aluminium products act as the release valve. They have mushroomed by over 30% so far this year to 2.8mn tonnes.
The question of how much of this export stream comprises real semis and how much "fake semis", metal transformed just enough to qualify for tax rebates, is vexing the global market.
But even real semis act to displace products demand, generating a surplus of commodity-grade metal. Evidence of that surplus in Asia is not hard to find.
Japanese port stocks stand at just under 500,000 tonnes.
The historical norm was 200,000-300,000 tonnes, with occasional but only brief deviations from that range. Even at the height of the global financial crisis, Japanese port stocks peaked at only 375,000 tonnes (in February 2009).
Then there was last month's single-day delivery of almost 100,000 tonnes of aluminium into LME locations in Asia. Port Klang in Malaysia received 67,925 tonnes and Singapore 27,775 tonnes.
Neither has received such volumes of aluminium for several years and the "arrivals" have been linked to traders liquidating stocks with the associated fear that there may be more to come.
But Japanese premiums are not falling in isolation. And they certainly wouldn't have fallen so hard had not US and European premiums already collapsed from their super-charged peaks of over $500 per tonne.
And although neither region is immune from the Chinese flood, the unwind of the bubble is at least partly down to the LME's assault on those two load-out queues at Detroit and Vlissingen.
The exact linkage between queues and aluminium premiums remains hotly disputed and may never be fully resolved.
But the simple fact is that at one stage of the game, no-one bidding for free metal in North America could do so without calculating the waiting time at Detroit for the simple reason that Metro, the warehouse operator that "owned" the queue, could itself bid at numbers matching the rental revenue reaped from the metal stuck in the queue. The linkage broke down at the height of the bubble and has broken again during the bursting of the bubble.
But it's impossible to understand fully the premium collapse without factoring in the LME's determination to reduce its load-out queues.
This has taken the form of forcing queue-affected operators such as Metro and Pacorini Metals at Vlissingen to load out more than they load in, a formula that was tweaked again in August to force even faster queue decay.
As a result, Vlissingen loaded out 100,000 tonnes of aluminium last month and Detroit 56,500 tonnes.
Most of this metal has in all likelihood gone into alternative off-market storage but the steady stream of metal out of the LME system has undoubtedly played a part in the premium collapse, if only because the LME's determination to kill the queues has changed market behaviour.
The collapse in premiums has also returned the global aluminium price structure to something close to the status quo ante.

Aluminium premium bubble over? Just don't tell LME


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