(Minews) - Europe’s aluminium buyers will have to pay the highest premiums of all major markets in the long term, while Asian buyers will enjoy the lowest, as Middle Eastern producers become the light metal’s price makers, sources said.
European premiums have raced to record highs this year in the wake of huge leaps in the US midwest levels that have also forced Asian premiums higher, and have continued to rise as strong demand, tight supply and high scrap prices are all reflected in the premiums, rather than the prices.
At present, US midwest premiums are the highest of the three major markets, at 0.205-0.21 cents per lb ($452-463 per tonne), with European duty-unpaid premiums trading at $290-315 per tonne and Japanese premiums at $300-320 per tonne.
European market participants have reported shipments going to the USA where previously they would have been sold into Europe, as sellers seek to benefit from that arbitrage. This is exacerbating the supply tightness in Europe.
“We’re seeing more shipments going from St Petersburg to the USA,” a trader said. “The gap [between US and European premiums] cannot stay like it is for long.”
Many people expect premiums to fall in all markets following the implementation of the London Metal Exchange’s new warehouse load-out rates in April, even though much of the metal that is expected to leave LME-listed warehouses will likely be delivered into off-warrant warehouses.
“The analysts still say premiums have to fall after the new LME rules come in,” a producer said.
But it is becoming clear that even if premiums do weaken from the second quarter there will be no return to pre-recession levels, when premiums made up less than 5% of the cost of buying aluminium. In the past few years, deep cuts in capacity have left western markets short of available metal, and premiums will have to be maintained at high levels to attract replacement metal from international markets.
Western consumers that have been waiting for relief on premiums have in the past few weeks begun coming around to the notion that premiums will stay at elevated levels over the longer term – even if consumers do expect premiums to fall from current levels before the second half of the year.
“We’re struggling with the market,” a purchasing source at a consumer said. “Our sales people keep asking us how long it will last.
Every bubble has a last round before it bursts, but the landscape has changed.”
After the shutdown of such facilities as Alcoa’s Portovesme smelter in Italy and Rio Tinto Alcan’s Lynemouth smelter in England, as well as large capacity curtailments at United Co Rusal’s plants, Europe will rely more on imported metal in the coming years than ever before.
And with production in the Middle East rising to a forecast 4.58 million tonnes this year from 2.80 million tonnes in 2010, it is the Gulf producers that will cater to much of that demand.
Aluminium Bahrain (Alba) produced more than 900,000 tonnes of aluminium for the first time in 2013, while Emirates Global Aluminium – the result of the merger between Dubai Aluminium (Dubal) and Emirates Aluminium (Emal), will have a capacity of 2.4 million tpy when the Emal expansion is complete later this year.
The levels at which Middle Eastern producers are willing to ship material to each of the world’s major markets will therefore go a long way to determining the delivery premiums attached to those markets.
“The geographic supply picture has changed,” a second trading source said. “The USA can no longer rely on domestic, Canadian and South American supply, as cuts have affected this, but has to look to the Gulf particularly; and the Gulf smelters are geared to shipping to the Far East.”
Given the logistical costs of delivery from the Middle East, Europe will need higher premiums than either of the other two major markets to maintain competitiveness for Gulf units.
“Asia should be the cheapest, Europe the most expensive, and the USA somewhere in between,” a second trading source said.
“The Middle East will be market making for all three zones,” the purchasing source said.
