- Unloved through much of the commodities boom in the first decade of the 2000s, mainly because of the high supply coming from China, aluminum had been performing strongly this year, along with other metals such as copper, zinc and lead.
But since hitting a five-month high on May 5 of $1,978 a metric ton on the London Metal Exchange, prices for the benchmark three-month aluminum futures have slid 6.3% through Friday, while other commodities have extended their gains. LME three-month aluminum futures ended Friday at $1,853 a ton.
The fall in prices is rattling aluminum producers such as Russia’s United Co. Rusal PLC, which this past week warned of a “new turn” in the global market for the metal. One troubling factor cited by Rusal in its first-quarter earnings report released Tuesday is the rising tide of Chinese aluminum exports. That could gather pace after China this month removed a 15% export tax on aluminum products.
Rising supplies are in turn reducing the premiums that producers can charge for immediate delivery of aluminum to consumers of the metal, which range from metal fabricators such as Novelis Inc. to canned-drink producers such as Coca-Cola Co. and auto makers such as Ford Motor Co.
That has come just as changes to the LME’s rules, aimed at easing bottlenecks at warehouses that store aluminum, are starting to have an impact.
The LME had come under fire in recent years from aluminum users because of the difficulty that buyers encountered in obtaining aluminum. At one point, customers had to wait as long as two years for deliveries.
The logjams benefited aluminum producers such as Alcoa Inc. and Rusal, because they could charge more for immediate delivery of the metal. Warehouse owners, including Goldman Sachs Group Inc. and Glencore PLC, also gained from high rental charges.
But the LME now is moving to force warehouses with delivery backlogs that last longer than 50 days to ship the metal quicker. The new rules, which became effective Feb. 1, should start to have a greater impact from June, the exchange said.
Already, delivery backlogs at warehouses have shortened to 474 days at the end of April, from 510 days at the end of March, according to data from Macquarie Research. The premium paid in Europe to get aluminum immediately rose to a peak of $400 a ton in October 2014, but has now dropped to about $300 a ton.
Meanwhile, the scope for traders to profit from storing aluminum and selling it at a later date is diminishing. The gap between the price for immediate delivery and the three-month futures contract has narrowed to $35.25 on Friday, from $42 a year ago, in part because stocks of the metal are lower.
“There is now less financial incentive to hold aluminum off [the] market,” said Caroline Bain, senior commodities economist at Capital Economics. “High LME rents and the flattening futures curve mean that it is more difficult to make profits on keeping metal in storage.”
While some of the metal no longer tied up in such trades is probably entering the physical market, some of it also is going into unofficial storage in cheaper warehouses located in Asia, as well as in the U.S. and Europe, analysts and industry executives said.
There has been a spate of cancellations of warrants on aluminum stocks at the LME; data for May 8 showed the biggest daily gain in canceled warrants since January. A warrant is a document of possession for metal held within a LME-approved warehouse, and traders usually cancel warrants when they want to take physical delivery of their metal.