Aluminium premiums, queues fall as warehouse action expected
* Europe aluminium premiums down 20 percent since late June
* Queues fall as warehouses cut incentives to attract metal
* Aluminium finance deals to limit fall in premiums - trade
U.S. regulatory scrutiny, lawsuits and proposed changes to metal storage practices have brought relief for buyers of aluminium as costs paid to secure material from warehouses have fallen some 20 percent since late June, industry sources say.
Waiting times at logjammed warehouses administered by the London Metal Exchange (LME) have also fallen.
Traders say Rotterdam duty-paid aluminium premiums dropped to $235-255 a tonne above the LME cash price from a record $275-295 in late June, after similar falls in the United States.
"If you take away the queues you take away the desire for warehouses to pay a big (incentive) to attract metal, so the premium falls," said the head of a physical metals team at a trade house.
After years of complaints by aluminium consumers that banks and trade houses artificially inflated premiums by building backlogs of up to 18 months at LME warehouses, U.S. regulators sprang into action this summer.
The Commodity Futures Trading Commission and the U.S. Department of Justice began preliminary probes into warehouse companies owned by JP Morgan, Goldman Sachs and Glencore-Xstrata.
On July 1, the LME proposed that as of April next year, a warehouse company with wait times of more than 100 days must load out metal at a higher rate than that at which it takes it in.
Experts expect that with all the U.S. political pressure, and with the LME itself a co-defendant in private lawsuits filed by aluminium consumers, the LME warehouse proposal will be voted through this October.
Wait times at key LME warehouses have already declined, meaning reduced rental income for warehouse owners. In Detroit for example, the delay is 293 working days versus 343 days on July 1, while in Vlissingen backlogs have fallen from 367 working days on July 1 to 332 days at present.
So far so good for long suffering aluminium consumers like brewer MillerCoors LLC, who told a U.S. senate hearing in July that inflated premiums have cost the company $3 billion in extra expenses last year alone.
The problem however is that even if the LME overhaul works to release the backlogged aluminium, investors might yet find a way to outbid consumers for metal, thus keeping costs high.
This is because of a long-standing feature of the aluminium market called financing deals which, though they work to inflate the aluminium premiums by tying up metal, are largely out of the reach of regulators or the LME.
"Banks are getting out of physical commodities but a bank is traditionally there for things like finance deals and that is what they will return to," said a physical aluminium trader at a large metals merchant.
Finance deals involve a bank, trade house, or investment fund borrowing money cheaply, buying physical aluminium, selling it forward on the LME at a profit, while striking a warehouse deal to store it cheaply in the interim.
They have, to date, tied up most of the estimated 10-15 million tonnes of aluminium stock globally, and because they are a feature of surplus markets and of a low interest rate environment, they are not expected to disappear soon.
Deals have actually become more profitable, on paper at least, since the summer upheaval, with the spread between LME cash and three month prices at $48 at present versus $43.50 on July 1.
And while some traders say bruised banks are doing less deals now, most agree the pause is temporary.