High aluminium premiums are being driven by rising demand and the large number of financing deals locking away the metal, a senior executive at Alcoa said on Wednesday November 7.
Aluminium premiums, which have rocketed over the past year, are unlikely to fall while interest rates remain so low, Tim Reyes, president of Alcoa Materials Management, said.
“Large sums of cash are available and money is relatively cheap,” Reyes said.
“The combination of market participants buying metal, holding it in warehouses, and selling it forward at higher prices has become a very attractive business – and this is what we’ve seen happen with aluminium,” he added.
The movement of metal out of warehouses into even cheaper storage deals is one of the reasons behind the rise in cancelled warrants, which indicate metal is set to leave warehouses, Reyes said.
“The metal is not going to consumers; about 90% of it is going to off-warrant warehouse storage facilities that have lower costs than LME warehouses,” he said.
“So it’s increasing physical demand and a large appetite for financing deals that has led to the higher premiums,” Reyes added.
Although inventories of the light metal rose significantly after the economic downturn hit demand in key consuming industries, like automotive manufacture, stocks are still down by 28 days of consumption from their 2008 peak, he said.
“LME and off-exchange supply is tightly held by financing economics, while Chinese inventories of just under one-million tonnes is only 15-17 days of consumption,” Reyes said.
Producer stocks are at record lows meanwhile, he noted.
Alcoa estimates aluminium will be in a market deficit of 262,000 tonnes in 2012.